Originally Published on November 16, 2016.
Wild times in the global stock and bond markets over the past week, no? Bond yields have shot up, with values correspondingly falling. While not nearly as significant as the 2013 Taper Tantrum, the current move is only seven days old. The question is why are those bond yields climbing? Many "experts" say it is because Trump is going to spur growth with tax cuts and infrastructure spending. That is possible, but because the infrastructure program will likely be financed by deficit spending…..it seems likely to me that the rise in bond yields is the result of market participants anticipating a wave of new bond issuance from the US government. Time will tell, but the government will have to pay for all that spending somehow... and it doesn't sound like it will be through raising taxes revenue in the foreseeable future. I would suggest that with the new Trump regime, the path forward is even murkier than we typically see with a new president. Either way, it should make for some interesting viewing over the next four years.
The US equity markets have rallied, however. Boy oh boy, have some of these stocks moved? Look at the oil/gas companies. Look at banks. Check out most of the heavy industrial companies. The participation by foreign markets has been almost non-existent, but hey doesn't America supersede the laws of economics? Um, no. The move in the US equity market has been significant and I suggest we call it the "chicken in every pot rally," to borrow the slogan of Herbert Hoover's 1928 campaign. Banks are rallying on the idea of deregulation, although that deregulation has not yet occurred. Steel companies and the miners of building materials have rallied massively, even though no stimulus plan has been laid out… and no plan is in place to pay for any future stimulus. Many in the construction equipment sector are soaring as well. Take a look at Caterpillar's (NYSE:CAT) 50+% run since January and 16% run in the last week. Moves like that suggest that Caterpillar's machines will be digging every hole worldwide for the next several years. It's also important to note that Caterpillar's management hasn't raised its 2017 forecast in the last few months, and projects very little (top or bottom line) growth between 2016 and 2017.
I most certainly did not vote for Trump, but the American people voted… he won the election... now we will be dealing with him for the next few years. (Honestly, I voted Kasich in the primary and was hoping for the Libertarian ticket in November). Now that Trump has been elected, who voted for whom is irrelevant… we must plow ahead with our investment game plans.
We have done more than our typical amount of trading in the past week. We made the following trades:
Bought 100 shares of Franco-Nevada (NYSE:FNV) at $55.17.
Bought 300 shares of VASCO Data Security (NASDAQ:VDSI) at $13.85
Sold 300 shares of Fastenal (NASDAQ:FAST) at $44
We are satisfied with these trades. They help meet our long-term objectives and that's what investing is all about. What do I expect in the coming years? That's a very tricky question until Trump's presidency really gets rolling. I suppose my base case is for higher bond yields (that 30-year bull market in bonds had to end sometime!), higher interest rates, more inflation and eventually a weakening dollar. We'll see if genuine growth is thrown in there, in addition to the inflation. In the intermediate run, I think higher bond yields will continue to put pressure on bond proxies… like dividend growth stocks and REITs, and I think these will provide good opportunities at some point. Additionally, there is no free lunch for the policies being proposed and I will likely continue to invest in gold/silver on meaningful pullbacks.
What opportunities do you see on the horizon?
Disclaimer: We are long FNV and VDSI. This update is for informational purposes only and should not be considered a recommendation for anyone to buy, sell or hold any equities. I am not a financial professional. Conduct your own research and seek the advice of a professional adviser before investing.