The people have spoken — at least 150 million of them. More than half of voters punched a ticket for change, so now Trump & Co. will be moving back into the White House. We are just happy the barrage of cringey political commercials is finally over (This is Rick Lear and I approve this message.)
The desire for political change is not a new phenomenon. The last three elections produced a president from a different party than the incumbent. Obama > Trump > Biden > Trump. This is a less patient America since the eight-year pattern of the 70s, 80s, and 90s. We remember a string of two term party rule — Obama, Bush, Clinton, Nixon. All two-term regimes in a world when family-time was greater than screen-time.
In 2024, the call for disruption was loud and clear with Trump winning all swing states. Furthermore, all 50 states increased their votes for the Republican candidate from 2020. See Exhibit A for the changes in percentage of votes from each state. It was not just the President, both houses of Congress now have a Republican majority.
Stock the Vote focuses on the implications of politics in investing. We try to “walk the fence” and not fall to either political side. It is often challenging as the wind blows and leaves us circling our straightened arms to regain balance and remain on the fence. It is important for investors not to take investment advice from people too far on one side. Their views are often warped by politics and decisions are not consistently sound.
In the note below, we address the investment implications of the red wave. It is more than politics as usual, it is a movement, a mandate for disruption. The goal now is to understand how much of the “bark” will lead to an investment “bite”. There are many factors to monitor as the dust settles over the next several months.
The following is an outline of the discussion:
1) How did this happen and why so many “surprises”
2) Portfolio positioning before and after the election
3) Factors to watch going into 2025
. . . . .
Exhibit A
Why Many Were Surprised by the Sweep?
Perhaps the biggest losers of the election were polling organizations. If you believed the polls, then you may have been shocked by the results. We discussed this fact in previous editions as the polls underestimated a candidate like Trump. The betting odds were the winners as a predicting tool. We also tracked this metric in previous editions, and they were an accurate predictor of the large lead for Trump.
The next quandary is how so many voters could switch sides from the last election. There were also clues here. Take Joe Rogan and Elon Musk as examples. I know, I know, these are two very controversial figures, but they are important examples of switching parties.
How can Joe Rogan, a guy that endorsed way-left candidate Bernie Sanders in the last election, switch? How can Elon Musk, a guy that makes electric vehicles and has supported Democratic candidates in past three elections, switch? To take the examples further, how can teamsters’ union president Tim O’Brien speak at the RNC after a history of backing Democrats?
We believe COVID accelerated the distrust of the government and led to the support for a disruptive outsider like Trump. The vaccine mandates were the tipping point for many. Somehow the shaming of those not getting a vaccine turned into a political issue. (Waving arms to stay on fence.) This rebellion manifested into a movement against the “woke” agenda associated with the Biden/Harris administration. What are the implications for investments?
Lear Global Vigilance Portfolio Positioning
Before the election, we had the risk knob turned to about a 7 out of 10. This decision to take risk served investors well and we will continue at this level as it is clear the new regime is pro-business and focused on growing the U.S. economy. However, it is not a zero-sum game — there will be losers. How do we identify the winners?
LearIM believes in the power of investing in themes. The themes selected have strong secular tailwinds that last for years, sometimes decades. One example is the Digital Revolution which has ushered in the adoption of machine learning, big data, and artificial intelligence. This theme will continue regardless of election results. Further, we believe in the need for energy to power this new world of data centers and supercomputers in our power-thirsty world.
The need for technology and energy is more powerful than politics. However, there are differences in how to express these themes based on government policies. Before the election, we believed in natural gas infrastructure and uranium to play a key part in powering the new world. We also invested in companies that supply key components to data centers and electrical grids. These investments were in place well before the election and remain today.
It seems obvious that the development of new power sources will be accelerated under the new regime. The appointee for the Department of Energy is on the board of a small nuclear reactor company and comes from the oil field services industry. This is a clear change from the current Secretary who has legal background.
We believe the new administration will move faster — less time, fewer permits, and the removal of other bureaucratic obstacles to building power sources. The culture of over-regulation and green washing is over. Before clean energy fans feel defeated, consider how clean and efficient uranium is for generating power. We hope this clean energy source will play a key role in our country’s future power plans. We recently added to the nuclear power theme.
Before the election we held a large allocation to gold. Gold is a “hedge” to stock declines, as well as inflation. This asset class has not performed well since the election for a host of reasons — the rising dollar and the “risk on” for stocks making defensive positions less attractive are the main culprits. We believe the recent pullback in gold is overdone, and the diversifying nature of gold plays a key role in the portfolio. The unpredictable nature of Trump 2.0 makes a hedge more important than ever.
The pullback in gold occurred while bitcoin rose to all-time highs. In line with the disruptive nature of the MAGA movement, Bitcoin has been an area supported by Trump & Co. Bitcoin climbed to $95,000, an all-time high, in the weeks after the election. We do not own Bitcoin directly, but recently added a Bitcoin mining company to the portfolio. Bitcoin miners present a very interesting opportunity as they are essentially data centers with racks of GPUs and access to cheap power. What if miners leased portions of their facilities to those looking for data centers to run AI?
Now What? Life After the Trump Trade
The Trump Trade was just that — a “trade.” We are investors, thus we play a longer game than those making speculative bets on short-term events. The initial reaction to the red sweep was positive for most stocks. However, the initial climb began to fade, and the game of investing went back to normal, which is to say, challenging.
The hangover from the party took about a week as the market realized it’s not all dandelions and rainbows associated with this disruptive administration. There will be rolling recessions in certain industries. This was clear this week when the suggestion of Robert F. Kennedy Jr. in the cabinet caused the pharmaceutical industry stocks to decline. Further, stocks of most other countries have fallen in fear of tariffs, with China being the most affected by tariffs. Portfolio holdings like Japan and India have also experienced declines.
If you are playing the long game, then investors must pay attention to factors other than the short-term reactions to events that haven’t happened yet by people that are not in office yet. There are several factors to watch in the next several months that will affect markets. There are many more factors in investing than politics.
Factors to Watch — World in Transition (WIT)
The 2022 year-end letter for LearIM stated the case for a World in Transition. There were several factors changing in the world. One factor was interest rates. Perhaps the most important factor to watch over the past decade was interest rates and the policy of the politically independent Federal Reserve. The mandate of the Fed is to control inflation and employment. Thus, interest rates, inflation, and employment are key areas to monitor in any year. We had another factor specific to this administration — tariffs and taxes.
Interest Rates - The Fed is in the process of “normalizing” rates. The target rate has been lowered by 0.75% so far this year to 4.75%, but at what pace will the lowering of rates continue?
Trump has voiced his displeasure with the high rates since his last term. The current leader of the Fed recently voiced his willingness to be patient in the normalization process. Chairman Powell’s term as Chair does not end until 2026. There will certainly be drama around Powell’s policy. We will be watching closely as the battle of lower rates to stimulate the economy will be center stage under the new President. Powell vs. Trump – The Rematch.
Employment - The U.S. economy is 75% consumption by people. People consume when they have money; the money comes from wages earned at a job. Thus, watching unemployment and wages will be important. In the employment category, we also watch the effects of advances in technology, also known as productivity.
Trump 2.0 created the Department of Government Efficiency (DOGE). This is code for less government jobs. There are around 3 million non-military government employees. “Efficiency” could lead to an increase in unemployment.
Tariffs and Taxes - Some economists call these the same thing, but we believe there are important nuances. A battle cry of Trump is increased tariffs and lower taxes. One is bad for the economy and the other is good. The tariffs can be used for positive outcomes also — improve trade imbalances with other countries or make products in this country more competitive. It is also possible the talk of tariffs is a negotiation tactic. Further, the tariffs will be dependent on the relationship with each country. We continue to be bullish on India and Japan.
In Summary
The World in Transition (WIT) will be accelerated under the new administration. But the initial stock rally of “everything” is over, and it is now time to assess the potential outcomes for different investments. The focus of Trump 2.0 will be growth of America. The growth of our country could come at the expense of other countries and even some sectors of domestic stocks.
There will be winners and losers, so we look for select securities as opposed to broad indexes. Many of the investment themes we have identified as winners will be accelerated in the next year. We continue to look for themes with strong tailwinds while controlling the risk of the portfolio with diversifying assets. In the end, we believe in this country no matter who is in control and continue to be excited for the roaring twenties.
Disclosures
LIM is a Registered Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. LIM is a company with purpose, dedicated to creative and unique thinking. We focus on portfolio valuation and research, along with a superior client experience. We seek to identify investment opportunities by looking at economic factors, security valuation and human behavior. We start with the fundamentals of portfolio management and valuation. Then we build on these fundamentals with unique thinking and creative intelligence gathering to form a viable investment thesis. We believe this approach leads to dynamic global portfolios with increased return and managed risk. LIM utilizes Charles Schwab & Co. Inc. (“Schwab”), a FINRA-registered broker-dealer, member SIPC, as its custodian of assets. LIM is independently owned and operated and not affiliated with Schwab. For additional information please contact LIM at 214-445-5900 or visit our website at www.learim.com.
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Sources:
https://www.cnn.com/2020/01/24/politics/bernie-sanders-joe-rogan-endorsement/index.html
https://en.wikipedia.org/wiki/Views_of_Elon_Musk#:~:text=Within%20the%20context%20of%20American,and%20Donald%20Trump%20in%202024.https://www.aljazeera.com/news/2024/11/10/us-election-results-map-2024-how-does-it-compare-to-2020