Are we entering an unprecedented period in history or are we just undergoing another “conservative” administration which cuts taxes, rolls back regulation, damages institutions it dislikes and generally blusters more than acts? Or does politics have basically little or nothing to do with how the market performs?
Does the market care who the president is?
Welcome to Part 5 on Surviving Trump (again). Parts One, Two, Three, and Four are at the links. If you read these, you have a good background on the seriousness of Trump’s threat to economic normality and in Part Four, a summary of basic investment vehicles like 401ks, Roth IRAs, and Traditional IRAs.
Please recommend this article and take the survey. That helps more folks note the info and helps me target it better. Previous article surveys show a majority of you manage your own investments while the vast majority have IRAs or 401ks or other retirement type investments.
Key aspect to note:
There are evidence-based assertions politics and policy have little effect on the economic performance of a given firm over a given time. But evidence shows politics and policy do affect overall performance of a nation’s economy, and they do affect firms that only do business in that nation.
This national versus international aspect is a crucial distinction for us investors.
Since WWII in the free world and the end of the Cold War in 1989 globally, most nations and most businesses have operated within an international trade and investment regime that has sought to impose a rules-based framework which protects business interests operating internationally. And, since WWII international trade has been dominated by the United States and its dollar.
We are now in a period of profound change in these frameworks.
That is why we need to carefully reassess our investment principles and practices (P&P) at this time. While some P&P will be able to stand the coming tests (diversify your investments, for example) others will not (9 times out of 10 the market rises in the first year of a new presidential administration).
What’s Changing and Who is Changing It?
In 2000 the US dominated with 25% of all global manufacturing. Its allied countries in the EU along with Japan, S. Korea and Australia accounted for another 50% of output, meaning the US and allies controlled 75% of global manufacturing. China, the strongest non-allied manufacturing state, accounted for 6%. In 2000 China depended on the US and allies for most of the investment and trade that was transforming that nation. It was not a member of the World Trade Organization, but it desperately wanted to join the international trade order.
The US stood as the sole superpower.
By 2030, given current trends, China will control 45% of global manufacturing. The US will produce only 11%. All its allies together will produce 27%, with the total US associated bloc producing barely half what it did in 2000 (38% versus 75%). China now dominates Africa and much of Asia outside Japan and S. Korea, which feel China’s growing heft.
Whereas until fairly recently the US and allies could exercise considerable control over the World Trade Organization (WTO), China has gained influence there. As a whole, the WTO has lost overall standing internationally due to China’s increasing takeover of manufacturing given the rules and tariffs as they are right now. There appears to be a growing consensus that China’s export led growth must be curtailed, and if that involves breaching WTO rules if those rules cannot be used to contain China’s dominance, then so be it.
The rules based international trade order is under threat by factors even worse than Donald Trump.
The Russia-Ukraine war has driven Russia to advocate a new global framework of trade and finance. This group, started in 2009 by Brazil, Russia, India, China and South Africa (hence the name BRICS), has now expanded to include Egypt, Ethiopia, Iran, and the UAE. These states have about 45% of the world’s population and contribute roughly 35% of global GDP (not the same as manufacturing, note). This year, 13 additional nations were offered partnership status: Algeria, Belarus, Bolivia, Cuba, Indonesia, Kazakhstan, Malaysia, Nigeria, Thailand, Turkey, Uganda, Uzbekistan and Vietnam.
In 2014 this group started its own development bank as an explicit rival to the World Bank and International Monetary Fund, directly as a consequence of sanctions imposed by US and allies following Russia’s seizure of Crimea. This group as a whole seeks to undercut non-UN supported sanctions, and wants “reform” of the UN Security Council and global financial and trade institutions.
They are also exploring ways to de-dollarize trade within the group. That’s why Trump recently threatened this group with economic consequences if they tried to opt out of using the US dollar for international trading purposes. De-dollarizing the amount of trade the BRICS plus the expanded membership conduct would create a powerful alternative economic structure explicitly aimed at reducing US influence over global political and economic affairs.
At the moment, US power rests not on manufacturing but on finance. In a word, the strength of the dollar.
While US GDP represents 27% of the global economy, the US “accounts for nearly 70% of the leading global stock index, up from 30% in the 1980s.” Ruchir Sharma, The mother of all bubbles Financial Times. Nearly 70% of flows into the world’s equity and credit markets are into the US.
And Sharma, Chair of Rockefeller International argued:
“This is not a bubble in US markets, it’s mania in global markets. At the height of the dotcom bubble in 2000, US stocks were more expensively valued than they are now. But the US market did not trade at nearly so vast a premium to the rest of the world.”
In other words, instead of just tech being overpriced as in 2000, most US stocks are overpriced. Way overpriced. That raises the stakes of a general, widespread correction across market sectors.
Adversaries rising; allies getting screwed
The BRICS coalition is an effort to counter American financial—note, not manufacturing and not GDP—dominance. We do not dominate in those terms. And the EU is not unsympathetic in the effort to check American financial power; outflows of investment from the EU to the US are sucking money away from Europe’s own needs, needs that are soaring due to the Russo-Ukraine war. And on Meet the Press December 8th, Trump again threatened to withdraw from NATO.
That, and US dollar dominance (which Trump wants to make into a dictatorship), does not make allies happy to long tolerate Trump’s antics.
If the BRICS initiative succeeds as the US becomes more isolationist and nationalistic, we would have, in effect, potentially the re-establishment of Cold War era type political and economic blocs, with the former Soviet leaning bloc, now under Chinese dominance, controlling far more of global manufacture and trade than ever achieved during the Cold War. China is already denying the US access to critical rare earth minerals.
The new BRICS bloc is already far stronger than the old Soviet one.
Faith in the dollar and the US as a safe investment haven underpins the only leg American global dominance now rests on. Smashing up NATO would alienate the EU and the UK bloc (UK, Canada, Australia, New Zealand). This is a manufacturing, trade and finance bloc rivaling the US in economic profile.
Nixon’s and Reagan’s use of American economic and financial power alongside its allies to bring down the Soviet Bloc would be reversed, with China using its dominance of global trade and manufacturing to erect a new framework with terms of entry and trade very unfavorable to US and allies. Add in the real possibility that Trump surrenders Ukraine to Putin and discards or break up NATO, and you have a decisive shift in the world order that has informed all investment, manufacture, trade and life as we know it for more than 50 years, since Nixon went to China in 1972 and Deng Xiaoping went to the US in 1979.
Obama’s Trans-Pacific Partnership agreement specifically sought to rein in China by using the existing WTO system to do so. For Obama, the pact aimed to ensure “the US—and not countries like China—is the one writing this century’s rules for the world economy.” TPP backgrounder
On his first day in office last time Trump withdrew the US from the TPP.
Hillary Clinton promised to withdraw also, true. But Biden supported re-negotiating the pact to include stronger labor and environmental rules, yet made no moves to do so. Globalization has become unpopular because so many companies shifted manufacturing abroad.
But voters fail to realize more Democrats voted against these agreements than voted for them. Republicans always delivered the vast majority of their side of the aisle. And they repeatedly supported firms moving assets abroad.
So far, Trump has only made promises to reverse this.
Biden and Democrats actually did reverse this policy with the CHIPs Act and the IRA and increased tariffs on Chinese goods.
Trump tried during his first administration to reign in China with threats and modest tariffs. His tiffs with Canada, Mexico and the EU over trade were relatively minor and short lived. In his second administration it is clear he recognizes the danger the BRICS alliance poses. What is not clear is whether he is competent enough to realize he needs the members of the Western Alliance system to wrest power back toward the once US dominated global trade system.
What is clear is that global trade and finance rules are under strong challenge. That could profoundly change the investment framework most of us for most of our lives have lived under.
America First could end up being America Alone. And most Americans could end up much poorer as a result.
Safety and Risk
So, given the threats facing us within the US from Trump and his henchmen, and those threats outside the US with China, Russia and allies actively seeking to create a quite different system, and with Trump shaking the very foundations of our alliance and trade system with his corruption and arbitrary tariffs and other behaviors, what can investors do?
First, let’s define the safety of an investment in terms of risk and volatility.
I just described one form of risk, the risk of major disruption of the global structure of trade and finance, and not in American’s favor. I have also just described risks to dollar dominance, and the risk of current market levels being in a major bubble.
Normally, when advisors talk of risk they mean the risk of you losing the money you invest. The supposedly safest investments are those guaranteed against loss. A prime example is a bank savings deposit. You are insured against a bank failure, with your deposits up to set limits fully backed by the US government that says it will return every penny you have deposited with the bank, no matter what.
That seems safe. Right?
Bank Savings are not necessarily the safest investment
Most banks in their regular savings accounts pay far less than the inflation rate in interest. If you are not earning an interest rate at least as much as the inflation rate (and that is measured several different ways), you are effectively losing money every day it sits in the bank.
As of December 2, 2024, the national average interest rate for savings is 0.6%. Some banks offer savings rate above 3.5%, with conditions. You can get “high-yield” savings account rates a bit above 4% if you keep a minimum amount of your money deposited for a year or so.
The average interest rate of 0.60% is well under this year’s COLA for Social Security, which is 2.5%. The rate of 3.5-4.5% for higher yielding accounts is above inflation, and so as long as inflation stays near the 2% the FED targets and the Federal Funds rate hovers near 4.6% which is what supports these “high yield” rates, you will be okay.
This is, however, a rare moment for this kind of investment.
Interest rates depend not only on the level of inflation; they also depend on demand. And, dollar focused ways to save (T-bills, money market funds, etc) have value that rests in large part on demand for the dollar, and that demand rests largely on US influence in global affairs.
The US and US dollar have been one of the safest, most secure countries and currencies to invest in.
Foreigners could invest here with confidence. The dollar was coveted and accepted everywhere.
Trump’s alliance wrecking, economy wracking antics and the BRICS are directly threatening that. I have not even begun to discuss the threat crypto currencies (350 of them and counting) and the increasing amount of trade they command pose to demand for the dollar. Nor have I addressed the effect Trump’s likely dramatic increase in US debt levels will have on faith in the dollar and demand for the T-bills that finance that debt. Nor the effect his barring of foreigners entering the US and mass deportations might have on foreign investors becoming worried about access to their investments in the US and who start moving their money elsewhere. Nor the effect Trump’s 6 bankruptcies and threats to repudiate US debts might have on the value of the dollar. Trump doubts effects of default.
Oddly enough, in order for the US to attract investment and retain “value” for the dollar if Trump does what he promises to do, the Fed will have to raise rates. But that will also depress investment and slow the economy, perhaps to stall speed.
We have a real danger of being trapped in stagflation under Trump.
So there is real risk to what traditionally has been the safest of investments: T-bills and US dollar savings.
Are Bonds Better?
Bonds are usually considered the second safest investment to hold. As long as those bonds are secured by real assets, the capital and the interest on the debt those bonds represent should be fairly safe. But we found in the banking crisis of 2008 that even triple AAA rated, supposedly ultra safe corporate bonds were not necessarily as safe or as well secured by real assets as thought. As with company stocks, a diversified bond fund with an array of types of bonds from more than one nation should be more secure than say, a municipal bond from a city in the US.
The main concern I have with bonds secured by real property is the increasing risk those properties face from climate change. Floods, fires, storm damage, and the risk of property being rendered uninsurable by climate change related disasters pose, I think, a greater than realized danger to bonds backed by liens on real property. Fed nixes climate change risk reporting.
I think when, not if, Florida real estate crashes these dangers will become far more apparent. But you won’t be warned by the banking system, as the link above shows.
I also prefer companies that deal in real estate to be able and willing to buy and sell properties in more than one country. While it’s nice to have long term leases on properties they own and manage, I also want to know a lot about those properties in terms of location and exposure to natural disaster. Up until very recently, REIT (real estate investment trusts) properties in FL and TX were considered highly attractive since those states were seeing major influxes of people and firms.
The shine is coming off of FL after two major back-to-back hurricanes devastated the state.
In a very strong sense, investing in major firms conducting business in multiple countries using multiple currencies could be, and I think will be, safer than holding T-bills or most bonds. The Bank of International Settlements issued a troubling warning, for the second time, this week. As summarized below: Warning.
“With U.S. Treasury investors facing the twin perils of debt oversupply and stimulus spending boosting inflation, there were "more reasons to be worried now" than when the BIS cautioned about sovereign debt earlier this year. The depth and liquidity of the $28 trillion Treasury market could insulate it from a sudden sharp rise in debt yields for some time. But it does mean that once (warning signs) show up, the impact on the global economy is bigger."
You should note the very real danger posed by Trump crippling the regulatory agencies overseeing, and currently enforcing, banking regulations. Republican led efforts ending Glass-Steagal and crippling the FBI fraud efforts (under W. Bush) led pretty directly to the 2008 fraud driven collapse. I think foreigners are more alert to these dangers than Americans. When the warning signs show up, investment money is bound to flow out of the overhyped US market sooner than later, boosting the prices of investments, including bonds, in overseas markets.
That is, of course, as long as Europe defends itself effectively against Russian aggression.
The question is, how do you invest more safely in such globally oriented firms?
The first step is diversify. Not just considering US stocks, but globally, particularly among firms conducting business internationally. Yes, they are more exposed to risks to the rules based trading world order if it gets cracked by Trump’s tariff wars. But, they also are not totally subject to Trump’s whims as are the businesses only doing business in the US.
The second is buy such international firms when they are on sale. That is, during a market correction.
The third step is look for firms with a track record of growth and good management. Usually, a record of paying dividends and increasing those dividends over time establishes a record of growth and good management.
Diversification without worsification
Diversification can be accomplished with an ETF (exchange traded fund). I prefer ETFs that are dividend growth focused. These firms also tend to be full of major companies with extensive international operations. You can also accomplish diversification by holding both ETFs and excellent international companies in the same portfolio.
Usually you need a minimum of 40 firms in your portfolio to get decent degrees of diversification if you don’t want to hold ETFs. I prefer both ETFs and company stocks.
These are some of my own P&P. I am sure, given how many of you manage your own investments, that you can add to these principles and practices in the comments. Please do.
Those 40 holdings (I prefer to say 42 firms, which is, as everyone knows, the answer to life, the universe, and everything) should be scattered across all 11 sectors of the S&P 500, or all the sectors in the NASDAQ or Russell 2000 or Dow Industrials or FTSE 500 or whatever index you want to follow.
I tend to use the S&P 500 as a general guide to diversification, but I don’t let its weightings control the weightings in my portfolio. I do try to stay under 25% of the portfolio being in any one sector.
The table below shows you various aspects to be aware of. You will notice that as a tech and consumer driven economy, the heaviest weights by capital value in the index are tech, at 31% and consumer goods (discretionary and staple) at 16.4%. But healthcare spending comprises over 17% of US GDP, yet it represents only 10.6% of the S&P 500. Technology spending as a percentage of US GDP is only about 9%. So at 31% of the index, what gives?
That is the result of tech firms being much more international in scope and it shows the international demand for their products. It also means much of US tech currently sets the global standards.
For example, knowledge and tech intensive industries (industries investing most into research and development) produced nearly 11% of global GDP. The US as a whole economy produces 26%. US Tech investment obviously represents global operations and not just those in the US.
The Beta column gives you an idea of how much volatility in prices of stocks goes on in each sector. Low beta (less than 1), such as in consumer staples, shows that is a sector much less affected by trading volatility in prices than consumer discretionary or tech. Beta, again, indicates the fluctuation in prices for companies. Utilities, for example, which are highly regulated, produce very reliable dividends and steady, but fairly small, growth. Prices of stocks in utilities fluctuate far less than for tech, and those prices usually predictably rise during a recession or threat of recession (when investors crave more security) and fall during booms (when investors are after higher returns and getting greedy).
I tend to buy utilities when few others want them. Like now.
The PE ratio columns show price over earnings. But note also, earnings are in general at all time highs. So if PE is high now, with earnings at all time highs, if and when earnings drop or revert to more average rates, that means the PE ratios now are even more out of line (higher) than they appear to be. Remember, the long historical average PE is a stock price of 15 times earnings. Recent averages in the US markets are a PE of about 20 times earnings. Many firms are at twice the recent average PE and Tesla is hitting around a 100 times earnings. This was discussed in detail last week (Part 4).
The market is betting on another big round of tax cuts boosting earnings. The market is betting tariffs and inflation and mass deportations are NOT going to have a big effect on earnings.
That should give you some pause.
The 5 year high of dividend yield for the SPY (an ETF mirroring the S&P 500 index), on average across all sectors, was 2.13%, the 5 year low (and current yield of the S&P 500 Index as a whole) is 1.19%. Two years ago it was 1.65%, and a year ago it was 1.52%. Now it is at a 5 year low, meaning that the cost of dividends (yield) are very high, i.e. stocks are overpriced, in general.
S&P 500 Sectors and Weightings (SPY end of Nov 2024)
Sector
|
Weight%
|
Beta
|
P/E
|
P/E Hi/5yr
|
P/E Low/5yr
|
Av Div Yield %
|
Consumer Discretionary
|
10.7
|
1.41
|
32.75
|
73.2
|
25.6
|
0.6
|
Consumer Staples
|
5.7
|
0.61
|
23.8
|
23.3
|
18.47
|
2.3
|
Energy
|
3.5
|
1.23
|
14.7
|
86.5
|
-386.7
|
3
|
Financial
|
14
|
1.13
|
19.8
|
21.5
|
12.8
|
1.3
|
Healthcare
|
10.6
|
0.69
|
22.55
|
24.8
|
14.8
|
1.6
|
Industrials
|
8.6
|
1.12
|
27
|
48.5
|
17
|
1.3
|
Materials
|
2.1
|
1.11
|
23.9
|
27
|
11
|
1.8
|
Real Estate
|
2.3
|
1.09
|
20.47
|
26.2
|
15.47
|
3.1
|
Technology
|
31
|
1.32
|
39.3
|
38.9
|
20.2
|
0.6
|
Telecom
|
9
|
0.97
|
22.8
|
28.4
|
15.4
|
0.8
|
Utilities
|
2.5
|
0.69
|
20.7
|
21.4
|
15.6
|
2.8
|
But there are always bargains to be had.
And, all markets (NASDAQ, DOW, S&P, etc) are markets of individual company stocks, not a just a “stock market” as so often described or the index, which is simply a summation of all the prices of the individual stocks. That means every company has to be considered individually, unless you buy it in an ETF or mutual fund. One company in a sector might be overpriced while another in the same sector could be underpriced.
If I were to buy an ETF now, it would be one for the utilities sector. And maybe for consumer staples. Those prices are relatively low now. And I would look at an international dividend ETF to get broader diversification. There are individual US companies to consider, but I cannot recommend individual stocks to you. A service like Simply Safe Dividends (you have to pay for their advice) is worth it for the self managing investor. There are other similar services out there; many have a mixed record.
The best route to learn which is which is to create “play” portfolios of their advised stocks, and see how they do over time. I have filtered through a number of investment advice services as a consequence.
And as noted, demand and hence prices of companies vary in a predictable way across many sectors. Demand for energy and materials demand and the prices of companies in those sectors rise in boom times and fall in recessions. Consumer staples firms prices fall in booms and rise in recessions, and remain relatively steady mostly throughout business cycles (i.e. they have a low beta). Consumer discretionary stocks fall in recessions.
If, as I think likely, Trump manages to cause a recession and/or high inflation, people might not need the latest iPhone, but they will still need food, and they will still need electricity in their homes and businesses.
Almost all stocks drop in a correction, particularly a big correction larger than the usual 20% or so.
I expect a big one sometime in 2025, especially if Trump and henchmen screw it up. Senate Democrats on the Joint Economic Committee released a hair raising report on the effects mass deportations could have on the economy, depending on how it was handled. Joint Economic Committee report. That report predicts the possibility, quoting from the Peterson Institute for International Economics study, of a Great Depression sized impact on the economy.
You assess the quality of his cabinet picks and tell me how competent you think they are in handling a complex economy and America’s global role, including protecting the value of the dollar.
The UK’s National Institute of Economic and Social Research (NIESR) is also highly dubious about Trump’s plans. Here’s the closing summary from this non-partisan research center run by the British:
The new president’s intentions to institute a sharp change of policy in several important economic directions is clear. Unlike in his first term, he will from the start have put in place a cabinet of loyalists who fully buy into his agenda. Thus, most of the “guardrails” that applied in 2016 will be off. We should expect radical change and a bumpy ride. The United States faces a multitude of complex problems, and it is clear that President-Elect Trump will try to deal with them with simple and far-reaching solutions, very likely too simple and too far-reaching. Policies designed for immediate implementation to maximise populist appeal will often not generate the results intended. Increased tariffs on imports will reduce US output and will cost jobs, as well as hiking prices. Expelling huge numbers of illegal immigrants will deny firms the workers and customers they need, will reduce GDP and, again, put up prices. Tax cuts will leave the US debt profile unsustainable while taking an axe to government spending risks, tipping the economy into recession. The potentially most damaging and long-lasting policy mistake would be to end the Fed’s independence, which is already compromised. Inflation, a significant fall in the dollar, and a sharp rise in risk premia would be the clear result of politicising the Fed. Overall, the policy package outlined above is likely to be ill-considered, rushed, and damaging to the US and global economies.
NIESR Report
Remember all you read above.
Yes, that means everything is risky. Especially now, especially in US markets.
Even the US dollar or treasury bonds. But most countries try very hard to defend the value of their currencies, especially if their leaders understand the threats and have competent managers leading those efforts.
You would think billionaires would be most sensitive to such dangers and most competent to handle them. But billionaires also have a much higher capacity to bear risks and usually are willing to take much higher risks than us small investors. Investment sites are even muttering CT about Musk and other billionaires planning to crash the market deliberately so they can buy up rivals to their businesses on the cheap.
They will be in charge come 12:01 January 20th, 2025.
But some companies are less risky than others, and if you manage to buy them at lower prices than now, that investment is even less risky (again, in terms of losing money spent to buy them). Yes, that partially means timing the market as a whole a bit, but it also means looking carefully at particular stocks. And never have the causes of a market downturn been so fully announced ahead of time as now.
And I consider those companies with global operations and good track records of earnings growth, paying dividends, and raising dividends as good bets now and even better ones if bought in a correction that appears overdue, inevitable and imminent (within 12 months or less). I expect the time of the correction/crash to be much less.
Next Week:
A deeper look at banks, quasi banks (much less regulated lending entities) and crypto currency risks as we look at how the financial sector (14% by weight) and the tech sector (31%) interact in the persons of Trump’s billionaire cabinet and billionaire tech bros DOGE.
Disclaimer and disclosures:
I am not a CFA (certified financial advisor). This article and comments are not investment advice from a fiduciary. They are discussions among investors with varying levels of experience. For over 30 years I taught state-market interactions at under-graduate and graduate level, focusing mainly on economic history and thought as well as specialized classes on international trade structures (WTO) and dynamics, and public administration as it relates to economic policy making, taxation and regulation, taught mainly in China. I was an area political-economic risk analyst for a decade for an internationally known risk assessment firm. I have technical degrees (and experience) as well as academic degrees, including a certification in Military History from West Point which would have let me teach ROTC classes if I had not gone overseas. I also started two small businesses (one a B-corporation type) and currently farm (organically and sustainably) in WA state. I have managed my own investment portfolios for at least 25 years. All advice is offered freely and from this context.