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Brexit, American Style: How to Play It!

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Point View's David Dietze.
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Markets shudder in the wake of a historical win by Donald J. Trump. The unexpected result echoes the Brexit vote in the United Kingdom, where pundits overwhelmingly predicted a rejection of Brexit but were wrong. Markets dropped strongly there, but came back fairly quickly. How should investors invest now in the wake of a Trump victory?

In a Nutshell

Think long term. Trying to time the market is a mug’s game. The markets failed to predict the election result, as did the pundits; be humble about your or any pundit’s ability to make a short- term call. Avoid any knee jerk reaction.

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Stay diversified. As this election shows, expect the unexpected. Make sure your portfolio contains all the asset classes, including fixed income, to reduce volatility and improve your risk tolerance.

Weakness in any one sector can offer opportunity. Sectors that investors are currently skeptical of, like financials, healthcare, and energy, may offer long term potential due to their cheap valuations. The downside if the new administration acts adversely to their interests may be much less than the upside if the current fears fail to materialize.

Don’t forget the macro-picture. Interest rates remain abnormally low relative to stocks. Greater fiscal stimulus, including tax cuts, can spur the economy and may boost inflation. Those trends benefit stocks over bonds. Don’t overweight fixed income at this juncture.

Short term volatility in response to a Presidential election is typical. It has not been a useful predictor of the long term. For example, the market fell after both Obama victories, yet the stock market had record returns over his administration.

Beware Short Term Market Reaction

It is a big mistake to extrapolate a short-term market reaction into a long term investment trend. In the wake of President Obama’s 2008 election, the market fell 5.3%; following his 2012 victory, it fell 2.4%. Yet, over the course of his tenure, despite fears of nationalization of both healthcare and banking, plus unprecedented partisan bickering, the market tripled.

Following George Bush’s 2004 victory, the market advanced 1%, yet stocks performed poorly in his second term. Stocks soared in the wake of Herbert Hoover’s 1928 victory, yet we all know what happened in 1929, as the crash then ushered in the Great Depression.

Analyze long term economic fundamentals when managing your portfolio. Ignore the short-term noise, particularly around emotional events like a Presidential election.

Stocks

Investors should focus on the underlying fundamentals, not the near term volatility around elections. We believe the fundamentals support the long term bullish case for stocks.

The domestic economy is picking up. Q3 GDP advanced by 2.9%. Unemployment is back below 5%, after a string of monthly jobs gains exceeding 100K. Even more importantly wages are starting to advance, with the October data showing gains of 2.8% year over year.

Corporate earnings for Q3, the mother’s milk for stock prices, have surprised all expectations. With 85% of all companies now having reported, 56% have exceeded revenue forecasts, 76% beat earnings predictions, and we are now expecting earnings overall to show a positive increase of nearly 2.5% year over year. That revenues are up for the second quarter in a row is particularly impressive.

Not all is well, however. Valuations are full, and stocks are close to all-time highs. Typically, you want to buy on dips. However, buying a dip is a short-term tactic. In any event, there are many sectors that are well off their highs and offer long term value, such as financials, healthcare, and energy.

Bottom line, continue to make equities the centerpiece of your portfolio, with a focus on undervalued sectors.

Bonds

Handling market volatility is about preparation, not about reaction. High quality fixed income is the antidote to unruly stocks. The Barclay’s Aggregate, containing government bonds and highly rated corporate debt, rose 5% in 2008, the year when the S&P dropped 37%.

Most analysts, including Point View, are cautious on the long-term outlook for fixed income. Interest rates and inflation are quite low, historically, making the long-term case difficult.

Still, the Federal Reserve, despite predictions of a rate hike in December, may well stay on hold, as insurance against pessimism sparked by prospects for a Trump administration. Many investors globally are piling into fixed income, as insurance against perceived failings in Trump policies, namely impediments to global trade. Commodities are selling off, partly in response to a possible lessening of trade with China. This adds to the case for the fixed income.

Trump has never shied away from debt. Both Presidential candidates talked about fiscal stimulus. Trump is committed to tax cuts. These policies can be inflationary, and that’s anathema to fixed income.

Bottom line, fixed income is insurance against the unknown, but the premium for that insurance is quite expensive. Equities, not fixed income, should be the centerpiece of long term portfolios.

Trump Policies

Investors are left largely unsure as to exactly what Trump will propose. Key will be to watch his initial appointments; is he able and willing to surround himself with high quality, experienced leaders?

Do expect fiscal stimulus and tax reform, particularly for corporations. An aligned Congress will facilitate perhaps the number one issue, allowing repatriation at a very low cost of corporate profits overseas. That would be market friendly.

The biggest concern is policies affecting global trade. An unraveling of NAFTA, for example, would be a major detractor to our economy. Investors await his first pronouncements, but must remain aware that our government is more than a single person. Focus on what happens, not what the President elect says.

Our Favorite Sectors

Financials seem to be the best bet. While both Trump and Clinton were critical of banks and Wall Street, we believe that some of the most feared regulatory policies will not be implemented under the new regime. Valuations remain quite favorable, with many companies trading below book value.

Healthcare also should be favored. Mrs. Clinton railed against the group and its “price gouging.” Efforts to impose price controls are likely to be more muted under a Trump regime. With the sector down 25% or more since 2015, valuations also support gains in this sector.

Energy should be viewed favorably. We know that energy stocks are down 25% since 2013. Trump’s stated policies would support fossil fuel exploitation and be less helpful to renewables. Service companies may perform better than exploration and production outfits, since pro-fracking/drilling policies may allow for less upside in the oil price. Nevertheless, so much capital investment has been cancelled and exploration curtailed we remain long term bullish on natural gas and crude oil prices.

David Dietze is the Founder, President, and Chief Investment of Point View Wealth Management, Inc., which works with families in Summit and beyond to provide customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. We are independent and fee only. How can we help you?

Contact David DietzeJohn PetridesClaire TothDonna St.AmantElaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc.

CNBC has named Point View one of the Top 100 fee-only wealth managers in America.

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