What to Expect When You Weren’t Expecting (a Trump Victory)
Written by Paul Siluch
November 22nd, 2024
Human beings think we are good at predictions, but we bat only about 51% (goodui.org). Our crystal balls and tarot cards are about as good as a coin toss, in other words.
51% was the margin most polls in the recent U.S. election suggested the Democrats would win by, only to be proven wrong. Democrats garnered 48.24% of the popular vote compared to 49.89% for the Republicans (Cook Political Report).
Pollsters spent millions to be right. They were not a good investment this year.
Canadians would have voted 64% for Democrats versus 21% for Republicans, so if you are disappointed in the outcome up here, you are not alone (Global News, Leger survey)
As investors, we can’t really afford to be political. The wind will blow with us in some years and against us in others. The U.S. is a resilient country that has faced this before, and it will survive the turmoil ahead.
Our job is to adapt to the current conditions and invest accordingly.
“Friend or foe, take the dough.”
- old trader’s saying
Guessing Right, Investing Wrong
Investing is a tricky business; in case you didn’t know that already.
For example, what about if you knew the outcome of this year’s U.S. election? Would you have made millions by knowing the future?
In complex systems, you can know the correct outcome but get the effects wrong. Especially when these systems involve human behaviour. Like politics and markets.
For example, if you correctly foresaw a win for President-elect Trump, how would you have restructured your investments in the days before the vote? You’d probably look back at 2016 to see what happened in the first month (source: StockCharts):
The best:
- +8.98% Dow Jones Defense Index (defense and armaments)
- +7.80% Financials (more deals for banks)
- +5.00% Bitcoin. No one noticed.
- +4.66% Industrials (“make it in the USA”)
- +1.05% Materials (gold) went up a little, due to the uncertainty.
The worst:
- -7.12% Staples (toothpaste and soap are too boring)
- -5.46% Utilities (low growth)
- -3.66% Real Estate
Applying this playbook to 2024 would have hurt you far more than helped you:
- +24% Bitcoin
- +3.88% Utilities
- +3.06% Energy
Energy, utilities, and bitcoin were the big winners in this election. Almost exactly the opposite.
- -3.39% Healthcare
- -2.57% Materials (gold)
- -2.10% Defense stocks
- -1.66% Industrials
Industrials, health care, defense stocks, and gold were the big losers in 2024. Almost exactly the opposite.
Even if you knew the winner, you may have placed the wrong bets.
Raymond James keeps a dedicated analyst named Ed Mills in Washington to monitor policy shifts and how the political wind is blowing. Here is his take on how things will shake out:
Tax Policy
Trump is likely to extend the 2017 tax reductions. Unless there is significant economic growth, this likely means a higher deficit and further hikes to the debt ceiling.
Trade
Harsher tariffs on China are in the works. They could also be extended to Europe, Mexico, and Canada, making global trade as volatile as we saw in 2017. Canada and Mexico face a renegotiation of what used to be called NAFTA in 2026. Not something we are looking forward to. Trump is a dealmaker, so tariffs are likely going to be used more as a threat than actual policy.
Monetary Policy
Trump wants lower interest rates because this is good for business. Lower rates could also cause higher inflation, which would push rates up, not down. It may be the bond market that limits Trump rather than his Democrat opponents.
Financials
There could be substantial changes that favour the banks under the new administration. The global standard of higher capital reserves is likely to be rescinded and stiff regulations against mergers and acquisitions could be softened. Good for banks and brokers.
Healthcare
On one hand, Republicans want less government involvement in healthcare, but they also want lower drug prices. RFK Jr. at the helm means far more scrutiny on big pharma and its highly- paid lobbyists. So far, this has been very negative for drug stocks. Bear in mind, we saw this back in 1994 when Clinton was president. Drug stocks were hurt for a year, then went on a multi-year rally as most of the proposed changes failed.
Would better nutrition -a major issue for RFK Jr. be a bad thing? Probably not.
Technology
Both Democrats and Republicans are very wary of the Mag 7 giants and their outsized influence. The Democrats wanted to break them up to control them while the Republicans probably end up fining them to accomplish the same thing. Valuations are high in this sector, so a comeuppance in 2025 would not be a surprise.
Energy
Trump’s “Drill, baby, drill” mantra, coupled with higher energy exports and fewer restrictions make energy look like a great place to invest. However, regulatory bodies (Federal Energy Regulatory Commission, for one) have their own agenda. The system was built with substantial checks and balances to slow radical changes.
Oil and gas drilling are ultimately determined by economics. When the shales were young and relatively unexplored, drilling was frenetic even under Democrat rule.
- The drill rig count in the U.S. peaked at 1,929 in 2014 under President Obama, an opponent of fossil fuels.
- Under Donald Trump’s “drill, baby drill” mantra, drill rigs topped out at 1,083 in 2018.
- Today? The U.S. had just 621 rigs in 2024 turning on a daily basis last week. Most of the best properties have been drilled and brought into production already, and what is left is lower pressure or higher cost. (Baker Hughes Rig Count)
Markets are still adjusting to the changes in Washington. And while there will be change, it will never be as drastic as we fear. The system is built with far more checks and balances than the Canadian system is.
What is not expected is optimism. Markets have begun to anticipate fewer government restrictions and the potential for ceasefires in both Ukraine and the Middle East.
A Peace Dividend would be both unexpected and welcome in 2025.
Lose the Battle, Win the War
Let’s take a trip down memory lane to discuss one of the points made above about health care. Drug stocks today have been pounded due to fears about lower drug costs and less government insurance coverage.
Haven’t we seen this before?
President Bill Clinton was elected in November 1992. Merck traded at a very rich multiple then, having enjoyed a wonderful 1980s decade of profits. It was priced at 10x book value and 6x sales before the election – these are high multiples. Clinton gained office with a promise of significant health care reform.
Merck shares declined about 30% by the election, from $10.50 to around $7.50. This is exactly the same as the 2024 Trump decline.
Here is 1992-1995 for Merck:
Bill Clinton’s wife Hillary was a young, smart, and ambitious partner to the new president. She became the standard bearer for his wide-ranging reforms which came to be known as “Hillarycare.” They were similar to Obamacare, which was a form of national health care.
Hillary was warned as she tried to do too much, too soon. The Republican opposition rebelled, and the drug industry fought back. The bill proposed in late 1993 failed in September 1994.
It was also a time of rising interest rates and a few bank failures, so markets were very rocky – especially for blue chip dividend payers.
Already down, Merck shares fell a further 25% during the political battles.
Where are we today?
Merck shares have declined 30% due to fears of RFK Jr.’s dislike of pharma companies and health care in general. Merck was not expensive when it peaked in June of this year. It is even less expensive now.
Valuations today are much closer to the absolute bottom of 1994 than the top in 1993:
| 1993 Election | 1994 Low | Today | |
| P/S | 6.0x | 3.3x | 4.0x |
| P/B | 10.0x | 3.6x | 5.6x |
Merck today trades for just 10.4x next year’s earnings – a level close to where shares bottomed in 1994. The dividend yield is 3.3% and Merck has raised its dividend every year for 13 years.
While we may be entering a hostile period for health care stocks, the market may already be pricing in the worst from RFK Jr. The new administration has bold plans to reform the system that will likely drag on for the first two years of the administration. It is going to be noisy and bumpy.
History says changes at the edges will happen, but vaccines and fluoride aren’t going away. Merck’s primary business is cancer drugs. They aren’t going away either.
2024 Deadlines
Canada Post Strike
We get one of these every few years, unfortunately. Each time, letter volumes dry up even further. Unfortunately for Canada Post, the letter business is disappearing.
Now is a good time to enroll in electronic delivery of your Raymond James statements, trade confirmations, tax slips or all three. Simply log in to your online access, select My Profile, Document Settings and make your selection.
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- December 13th for mutual funds
- December 20th for stocks
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