⚑ Joe Mac's Market Viewpoints

Joe Mac’s Market Viewpoint: Game-Changer Part II: Trumponomics Themes

Infrastructure and Capex: Trump’s plans to rebuild the nation’s infrastructure will have profound implications for several very specific industry groups in the United States. Trump has said that, as President, he would “rebuild our highways, bridges, tunnels, airports, schools, hospitals,” an effort that “will put millions of our people to work.” The problem we have with the directly-related themes is that many pure-play stocks have already run up dramatically prior to the election on expectations of strong fundamentals resulting from the 2015 Highway Bill signed into law just a year ago. Some asphalt and cement producers are already sporting multiples that are typical of biotechs or social media giants — selling at 30-40 times next year’s earnings estimates.

Nonethless, the broad sector of capital spending-sensitive issues, when combined with other features of the Trump plan, could be poised for several years of outperformance. From building the wall with Mexico, to imposing tariffs on imported goods (like steel), to the infrastructure rebuilding program, and the proposed tax cuts on individuals and corporations, plus the plan to re-patriate billions of corporate dollars held overseas — all suggest there will be substantial increases in demand for industrial materials and machinery. In particular, there is a provision in the Trump plan to allow a 100% write-off on plant and equipment investments, which if adopted, would pull forward a lot of future spending.

Obviously, engineering and construction companies would benefit as well but many of these are more dependent on corporate capital spending than on public infrastructure. Broader improvement in cash flows could result from other aspects of the Trump proposals. Improved corporate cash flows resulting from lower taxes and higher growth rates could spur a boom in private sector non-residential construction outlays. So, with this report we are adding capital spending as a new MRP theme. Industrials (XLI) and Materials (XLB) are two of the 10 main sectors of the S&P that should outperform over the next few years, driven by a resurgence in overall capital spending, and we are adding both as new themes.

On a more granular level, the steel industry could be a much bigger winner percentage-wise, and so we are adding Steel (SLX) as a theme for more aggressive investors.

Financial Services: Under the Trump administration, the environment over the next several years should also be particularly good for the fundamentals of the financial services industry – in particular, the banks. Rolling back onerous regulations imposed over the past decade would be an obvious positive. In addition, changing expectations about the interest-rate and inflation outlooks has already resulted in a steepening of the yield curve and that is likely to continue. Lastly, if the new administration is successful in accelerating the US GDP growth rate, that should be reflected as well in an acceleration in loan demand. So, fewer regulations, better spreads, and stronger volume growth would add up to a greatly improved environment for banks and financial services in general. We are, therefore, adding the financial sector of the economy as a new Trump Victory theme. One way to gain exposure to the theme is through the Financial Sector SPDR ETF (XLF).

Within the banking sector, regional banks should be major beneficiaries. We are adding the group as one more new theme and will track it through the SPDR S&P Regional Banking ETF (KRE).

The bottom line is that we remain bearish on bonds, we continue to think value stocks will trump growth stocks, and energy is still a favorite sector. Moreover, we are adding oil services, capex plays, and financial services as new MRP themes. We will be monitoring the progress of these new themes with the OIH, XLI, XLB, SLX, XLF, and KRE ETFs. Many of the stocks included in these sectors and industries have had very strong rallies since the election. We are surprised at how quickly the share prices have moved, and had been hoping for a pullback before launching these new themes. Nonetheless, it seems to us that the upside potential over the next few years could be multiples of what has happened so far and, therefore, we are launching the themes effective with this report.