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November 15, 2016

The political maverick scores a victory and creates uncertainty for the economy and the markets.



The failures of our political leaders over the last decade ushered in an opening for Donald Trump to obtain the presidency.  Trump cleverly realized this and seized on the opportunity.  Trump’s campaign was full of rhetoric and promises seemingly made without true regard to what was achievable.  Now that Trump has captured the presidency we will likely see an agenda laid out that is more realistic with what this country can afford and the Congress will accept. 

Wall Street and corporate America was a strong supporter of Clinton as she promised the continuation of policy that they had grown comfortable with and sought to have continued. Several sectors of our economy received favoritism by the Obama regime that may not continue under Trump.  The media and Wall Street got so caught up in attacking Trump by fabricating policies and extrapolating on policies they claimed Trump would unleash on our economy and the world, that they began to believe this nonsense themselves. Wall Street and emotional investors are now seemingly making poorly researched investments based upon the policies and rhetoric talked about during the campaign.  As a result the four tech giants have declined by 5 to 10% since the election.  Amazon has fallen over 9%. Fixed income markets have fallen 5% or more with yields on treasury rising by over 50 basis points.   Emerging markets have fallen over 10%. Gold has declined close to 10%. Conversely Industrial stocks have gained over 5%. Biotech has gained over 12%.  Small-cap stocks have gained 8%. Financial stocks have gained over 10%.  The broader market as measured by the S&P 500 has risen 1.5%, the Dow Jones industrial average has risen 3.3%, and Concord’s Dynamic Growth has gained 0.2%.

While the markets have changed a bit overall, and quite a bit among sectors, the economy remains the same.  The outlook for growth is still challenged with the growth in global consumption at the lowest level it has been in years.

Prior to the election the best growth in earnings for 2017 was expected from technology, healthcare, and consumer cyclical sectors, as measured by the consensus of Wall Street analysts and as evidenced in the weightings of our portfolio. Those expectations remain the same today but the recent market performance indicates that investors believe we are on the verge of a change in leadership in earnings for the year ahead.  Experience has told us that markets become emotional in the short-term but eventually are fairly efficient at discounting earnings growth.  Is the new leadership in the market an irrational emotional response to the rhetoric of the campaign of Mr. Trump?  We suspect that this is true.   Most presidents generally seek to move on their campaign promises, but this maverick is clearly known to not be accountable to previous statements or promises.  Now that Mr. Trump has the presidency secured, information about his true intentions will start to emerge and the markets will react as that information leaks out.  Further, it is not unreasonable to infer that some of the things Mr. Trump has promised will unfold.  These things will likely include but not be limited to strong reforms to immigration, tax cuts for corporate America, de-regulation of the unfair handcuffs on small businesses, opening up more land for drilling and energy production, changes to trade policies with China and other emerging markets, healthcare reform that abolishes Obama care with a new program that centers more on lower prices from free markets across state lines, and a significant reduction in spending on entitlement programs.

I suspect that Mr. Trump will go to the American people with a plan to clean up the swamp in Washington with some sort of term limit legislation as well as tough enforceable legislation prohibiting self-dealing.

This is a lot for Trump to accomplish.  Who will benefit if we are correct.  It would seem like our exposure to small-cap stocks needs to be raised at the expense of large caps exposed to significant trade with China.  Energy will benefit from less regulation and is already cheap given where the price of oil is today.   Energy needs to increase in our portfolio and be reallocated. 

The financial and industrial sectors were already expensive prior to the Trump presidency as investors pushed these areas up despite a poor outlook for earnings. With American government debt already at 15 trillion, the idea of spending another trillion or more on infrastructure may be re-evaluated by Mr. Trump.  The selloff in treasuries and the rally in bank stocks is likely overcooked in the short term.

Overall, we do not expect a significantly different looking economy over the next few years than we have already experienced over the past few. We believe Mr. Trump will make change and will likely go down as a highly successful president but we believe it will take a second term to accomplish all of his agenda and make a significant dent in the problem we have currently with growth.  There is simply no quick solution to our growth problem.

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