Taking Stock

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By Tony Crowell
By Tony Crowell

Expect The Unexpected

An unexpected event ran into an unexpected reaction. The initial reaction in the early hours of Wednesday to the contest turning in Mr. Trump’s favor was quite negative with the Dow Jones futures diving nearly 800 points. This echoed the conventional Wall Street predictions that a Trump victory would send stocks to the cellar.

The market dislikes uncertainty. It lost ground last month on the email turmoil then came back when the FBI Director said the probe was concluded, resolving an overhanging uncertainty. Much short-term market volatility stems from emotions and the overnight pirouette in world stock markets was partially attributable to resolution of the major uncertainty of the election outcome. A narrow victory by Mrs. Clinton with ensuing legal challenges would have awakened memories of the drawn out contest in 2000, probably sending stocks into a repeat of their dismal performance then.

In any event, the Dow Jones Average sprung up 256 points the day after the election and is currently trading above its record close in August of 18,636. Stocks frequently react unexpectedly and investors should always try to control their emotional reactions. This caution is particularly timely now to investors who were deeply committed to either candidate.

The market, itself, is always a significant tell-tale, showing wind direction. Besides resolution of one uncertainty, some prefer the idea of a clean sweep, with Republicans winning the House and Senate as well as the White House. Mr. Trump has reiterated his intent to step up spending for infrastructure, a welcome fiscal stimulus. The economy is finally accelerating its hesitant recovery and fiscal stimuli should meet a receptive economy.

This translates to a long delayed increase in inflation and interest rates. Bond prices (which move inversely to interest rates) are already tumbling. The Federal Reserve begins its next meeting on December 13 and will probably announce the first interest rate increase since last December. That will still leave rates in a low range but Wall Street sometimes reacts to these announcements as if they were totally unexpected.

Bonds are wonderful buys when the economic cycle is shifting toward lower rates. That’s probably years away and they are not timely now. Political and business wind shifts will cause stock price volatility and investors should emphasize well-placed companies with substantial resources. Energy will face less regulatory scrutiny although energy stocks will probably not move much until oil is above $50 a barrel. Chevron (CVX-$108) yields 4% and is a solid holding for patient investors.

The President-elect has said that he wants to strengthen the military. That will probably flow into larger defense budgets next year. Huntington Ingalls (HII-$171) bounced up and had already forecast higher earnings. Financial stocks are up on the prospect of eased regulations. JP Morgan Chase (JPM-$76) and Morgan Stanley (MS-$38) are the standouts. Vulcan Materials (VMC-$136), the largest provider of construction aggregates, moved up and also remains a buy.

The healthcare sector, the worst performer this year, reacted favorably as fears eased of measures to restrict drug prices. All other stock sectors rose after the election except the technology group, the previous leader this year. This seems attributable to Silicon Valley’s broad support for Mrs. Clinton and, more rationally, to concerns that narrowing trade agreements will strangle export sales. This is too vital a sector to remain subdued for long and investors should remember that our President is not a Czar with absolute authority.

A political historian wrote that President Harry Truman felt sorry for Dwight Eisenhower. If Truman, merely a failed haberdasher, after all, bristled at the obstacles to his presidential authority, imagine how aggravated his successor, a former five-star general, would be. Tapping on his desk in the Oval Office, Truman remarked, “He’ll sit here and he’ll say, ‘Do this! Do that!’ And nothing will happen. Poor Ike—it won’t be a bit like the Army.”

A promotion to commander in chief, in Truman’s estimation, would limit Eisenhower’s power. His orders, delivered as an elected official, would lose the sir-yes-sir acceptance that they received in the military. To hear Truman tell it, the president could do little more than implore: “I sit here all day trying to persuade people to do the things they ought to have sense enough to do without my persuading them. … That’s all the powers of the president amount to.”

Mr. Truman’s historical record also illustrates how the enormous responsibilities of the Presidency can cause an untested newcomer to the office to exceed expectations. Investors should try to expect the unexpected.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622


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