A First Look at the Election and Markets

The morning after “Super Tuesday” in the presidential primaries usually means the stage is set for the upcoming battle between Democratic and Republican candidates for the job of “leader of the free world.” And while there wasn’t much drama this year regarding who would be the two candidates fighting it out from here on, last night’s dominance by former President Trump and current President Biden certainly cemented the fall contest.

So, and I say this with reluctance, as my palate for politics over the past eight years has grown increasingly bitter and caustically unpalatable, it is now time to look at presidential politics and what it might mean for the markets going forward.

In a recent edition of my daily market briefing, the Eagle Eye Opener (which if you don’t subscribe, what are you waiting for?), we took a look at what sectors would likely benefit if Donald Trump wins a second term in office.

Luckily, we have a blueprint for the types of policies that would be implemented in a second Trump term because we had the first term, and we should expect (broadly) more of the same. Importantly, the S&P 500 posted a 37% total return during the first three years of Trump’s presidency, so the first three years were indeed favorable for investors.

So, what sectors are likely to be winners and losers in a “Trump 2.0” administration? To assess this, we looked at the performance data between January 2017 (when Trump took office) until January 2020 (the month before the pandemic, as that event skewed markets and overshadowed normal government policies).

Potential Policy 1: Tariffs on China. Trump has threatened 60% tariffs on Chinese goods and to revoke China’s “most favored nation” trading status. Obviously, those policies would be negative for Chinese shares and emerging markets more broadly, as they would increase trade tensions. So, that’s presumably negative for ETFs such as the iShares China Large-Cap ETF (FXI), iShares MSCI Emerging Markets ETF (EEM) and even the iShares MSCI Emerging Markets ex China ETF (EMXC). How did they trade during the last Trump presidency? From January 2017 to January 2020, FXI returned 12.62%, EEM returned 10.48% and EMXC rose 7.85% compared to a 31% gain for the S&P 500, so Trump’s policies did likely influence China and EM underperformance versus U.S. stocks.

Potential Policy 2: Pushing “reciprocal” trade. Trump has stated he wants to reduce the U.S. trade deficit to $0 and would aim to accomplish that via tariffs (10% was floated by Trump last summer) across virtually all nations that export to the United States. Additionally, Trump has stated he would push “reciprocal” trade to try and eliminate tariffs on U.S. goods via threatening additional tariffs on those nations. This would likely be negative for the iShares MSCI ACWI ex U.S. ETF (ACWX). How did they trade during the last Trump presidency? From our calculated time period, ACWX rose 12.6% so global markets did lag the S&P 500 during Trump’s presidency.

Potential Policy 3: Dismantle Inflation Reduction Act, EVs/green tech. Trump has stated that he wants to dismantle the Inflation Reduction Act via executive actions targeting regulations, executive orders and Department of Justice actions. This would potentially be negative for sustainable investing funds (think Vanguard ESG U.S. Stock ETF (ESGV) and similar ETFs) and clean energy and green ETFs such as the Invesco WilderHill Clean Energy ETF (PBW). How did they trade during the last Trump presidency? During the said time period, PBW rose 53.12% as clean energy stocks outperformed as fears of punitive ESG and green investing policies never materialized.

Potential Policy 4: Boosting oil and gas production. Through reduced regulation, Trump wants to increase domestic oil and gas production. Production did rise during his presidency; however, the results were mixed from a performance standpoint as foreign oil entities (including OPEC) altered production while other forces (the ESG movement) impacted share price performance. This has mixed implications for ETFs such as the Energy Select Sector SPDR Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). How did they trade during the Trump presidency? From January 2017 to January 2020, XLE gained just 3.6% as oil prices were contained while climate focus challenged the long-term investment thesis of many oil and gas companies.

Potential Policy 5: Increased defense spending. Trump wants to increase defense spending and it did rise during his presidency via initiatives such as Space Force and other programs. How did they trade during the last Trump presidency? During our measured timeframe, the iShares U.S. Aerospace and Defense ETF (ITA) rose 41%, outperforming the S&P 500.

Potential Policy 6: Decreased bank regulation. Trump has stated he wants to ease regulation on banks including easing capital requirements. Additionally, he has openly said he wants to replace Federal Reserve Chairman Jerome Powell and that could potentially be negative for interest rates, possibly increasing borrowing demand. How did they trade during the last Trump presidency? During the said timeframe, the SPDR S&P Bank ETF (KBE) rose 13.99% while the SPDR S&P Regional Banking ETF (KRE) gained 11.7%, so both sectors lagged the S&P 500.

Finally, barring a major surprise, the general election matchup will be Trump versus Biden, so familiarizing ourselves with potential policies (and possible sector winners and losers) is important. We’ll continue to refresh this research throughout the campaign as needed, so regardless of who wins the White House, we know what sectors stand to benefit or suffer depending on the new president’s agenda.

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ETF Talk: China A-Shares — You Can’t Always Get What You Want

The classic by the Rolling Stones, “You Can’t Always Get What You Want,” applies as much to the market as anything else — and who doesn’t want a taste of forbidden fruit when the opportunity arises? Once again, loyal readers, we are looking to China to treat our portfolios with sweet potential.

As I wrote last week, there is deep value in China for “blood in the ‘red’ streets,” if investors are willing to follow in the footsteps of Baron Rothschild and take a contrarian position while others flee. So, let’s have a look at the fruit — a fund that can get your teeth into China’s local economy, iShares MSCI China A ETF (CNYA).

This exchange-traded fund (ETF) tracks the investment results of an index composed of domestic Chinese equities that trade on the Shanghai (SSE) or Shenzhen Stock Exchange (SZSE). Through this ETF, investors can gain exposure to the locally listed portion of the Chinese stock market that is denominated in the local currency, while minimizing risks associated with investing in China’s domestic market.

In other words, CNYA provides access to large- and mid-cap stocks from the Chinese A-shares market, which has historically been largely inaccessible to international investors due to government restrictions on foreign investment.

The fund has a total of 520 holdings and net assets of $182.16 million. Top sectors in the fund are Financial Services at 20.14%, Industrials, 16.11%, Consumer Defensive, 14.26% and Technology, 13.18%. As of March 6, the fund is up 9.87% for past month, down 1.04% for three months and up 0.58% for the year to date. It has an expense ratio of 0.60% and a satisfying dividend yield of 4.19%.

Courtesy of stockcharts.com.

Its top 10 holdings are heavily weighted toward Consumer Staples and Financials. They are: Kweichow Moutai Co., Ltd. Class A (600519.SS), 5.69%; Contemporary Amperex Technology Co., Limited Class A (300750.SZ), 1.91%; China Merchants Bank Co., Ltd. Class A (600036.SS), 1.76%; China Yangtze Power Co., Ltd. Class A (600900.SS), 1.69%; Wuliangye Yibin Co., Ltd. Class A (000858.SZ), 1.49%; Ping An Insurance (Group) Company of China, Ltd. Class A (601318.SS), 1.24%; Agricultural Bank of China Limited Class A (601288.SS), 0.99%; Shenzhen Mindray Bio-Medical Electronics Co., Ltd. Class A (300760.SZ), 0.95%; Industrial Bank Co., Ltd. Class A (601166.SS), 0.92% and Industrial and Commercial Bank of China Limited Class A (601398.SS), 0.91%.

It is notable that the top two holdings are in consumer goods and automotive companies — two of the sectors anticipated to play a significant role in buoying the dragging economy. Alongside talk of tax policies to incentivize consumer spending, potential further reserve ratio cuts suggested at the National People’s Congress meeting on Tuesday by the governor of the People’s Bank of China have made the risk/reward there more attractive.

But before taking that proverbial leap into becoming enamored by this week’s fund, let’s step back for a reality check. Earlier this year, I discussed the rout in the Chinese stock market in my Eagle Eye Opener and what I’d want to see before allocating exposure to China: reserve ratio cuts and more business-friendly rhetoric and practices from China’s government.

In late January, Chinese authorities announced a 50-basis-point reduction to reserve requirement ratios, and this past Tuesday’s annual meeting of the National People’s Congress revealed an economic growth target of around 5% with an announcement to provide moderate economic stimulus to boost domestic consumption. The stimulus offers incentives to buy new vehicles and household appliances, industrials, as well as support for clean energy and the development of scientific and technological innovation in areas such as artificial intelligence (AI).

So, what does all this mean, and where does the forbidden fruit come in?

The anticipated slowdown in Chinese exports and the reported policy talk around boosting personal consumption, creating jobs and supporting innovation suggests a focus on picking up the dragging domestic economy in the world’s most populous nation. China undoubtedly is a difficult market to access for foreign investors, and one that could prove to be worthwhile for those looking for value and a contrarian opportunity.

So, if you are tempted by the exotic fruit of a “forbidden” market and want to get in now to take advantage of growth down the line, this ETF may well satisfy your hunger.

While this fund has outperformed others focused on China A-shares, there is always regulatory risk and volatility to consider when investing in China’s domestic market. Investors should always do their due diligence before adding any stock, fund or ETF to their portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.

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In case you missed it…

In the Name of the Best Within Us

“Jim, I love your closing salutation on all of your newsletters. The one that says, ‘In the name of the best within us.’ But I was curious, where did you get that and/or how did you come up with that? Thanks in advance, Steven T., Paso Robles, Calif., a loyal reader.”

First off, thank you, Steven, for your question, for the loyal readership and also for knowing the virtue of living in one of the most beautiful and picturesque areas of California, especially if you are a wine nut like me. And I also expect to see you in September at the Whale Rock Music Festival (I go every year, and this year’s just-announced lineup is outstanding).

Now, to your question, “In the name of the best within us” is the title of Chapter X, Part III of what I consider to be the greatest novel ever written, Atlas Shrugged by Ayn Rand.

The novel is an epic tale of adventure, marvelously wide in scope and yet intimately profound. Indeed, it’s no wonder that the novel is cited by so many as one of the most influential books of their lives, and one of the most important novels ever written.

Case in point is my Eagle Financial Publications colleague George Gilder, who called Atlas Shrugged, “the most important novel of ideas since War and Peace.” Writing in The Washington Post in 1986, Gilder explained, “Rand flung her gigantic books into the teeth of an intelligentsia still intoxicated by state power, during an era when even Dwight Eisenhower maintained tax rates of 90 percent and confessed his inability to answer Nikita Khrushchev’s assertion that capitalism was immoral because it was based on greed.”

And now you know one of the many reasons why I consider it an honor to share publishers with George Gilder.

The theme of Atlas Shrugged is the role of man’s reasoning mind in achieving all the values of his existence. Its complex and intricately woven plot is driven by a central and seemingly contradictory question. That question, explains Ayn Rand Institute scholar Onkar Ghate, can be summed up as the following:

“If the men of the mind are the creators and sustainers of man’s life, why do they continually lose their battles and witness their achievements siphoned off and destroyed by men who have abandoned their minds? The story focuses on how the men of the mind learn to ask and to answer this question, thereby putting a stop to their own exploitation.”

Now, a complete analysis of Atlas Shrugged is way beyond the scope of this column; however, I assure you that over the course her magnum opus, Rand demonstrates what happens when those who move the world decide they’ve had enough of being the victims of a society with warped ideas designed to demonize their effort.

I strongly encourage you to read what I consider to be the greatest work of fiction ever written. And yes, I know that at 1,192 pages the novel is a beast to commit to; however, it’s a beast that could quite possibly alter your life in profound ways. I know that it did for me. And as an aside, I found that listening to the audiobook of Atlas Shrugged, as read by the great Scott Brick, was an amazing and immersive experience that was nearly as profound, and dare I say even more dramatic than my first read of the novel in the summer of 1984.

Back to the use of “In the name of the best within us,” as my complimentary close. The reason I use that is because of what it means to me, and what it signifies in the novel. I consider it a motto in life, one that I strive to live by in literally every moment.

You see, in any given moment, or in any given decision, or in any moment when we can make a conscious decision, we have the ability to put our best effort into that moment. Indeed, we have the ability to (or not to) give that moment the very best within us.

Put more colloquially, we can choose to do our best, or we can choose to make a modest and half-hearted effort. When we choose to do things in the name of the best within us, that means we choose our best selves.

In the novel, as Ghate writes, “The only reason man has ascended from cave and foot to skyscrapers and locomotives is that there have been individuals like Dagny [one of the novel’s protagonists], who knew what the best within them was and who never let it go — and now these individuals know the meaning and the glory of that which they had been dedicated to.”

Perhaps a passage from the novel’s chief protagonist, John Galt, will provide you with the deeply emotional answer to the question of why I chose, “In the name of the best within us,” as my closing salutation:

“In the name of the best within you, do not sacrifice this world to those who are its worst. In the name of the values that keep you alive, do not let your vision of man be distorted by the ugly, the cowardly, the mindless in those who have never achieved his title. Do not lose your knowledge that man’s proper estate is an upright posture, an intransigent mind and a step that travels unlimited roads. Do not let your fire go out, spark by irreplaceable spark, in the hopeless swamps of the approximate, the not-quite, the not-yet, the not-at-all. Do not let the hero in your soul perish, in lonely frustration for the life you deserved, but have never been able to reach. Check your road and the nature of your battle. The world you desired can be won, it exists, it is real, it is possible, it’s yours.”

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Do It Right

“It is easier to do a job right than to explain why you didn’t.”

–Martin Van Buren

Spend any significant time in an organization of any type (professional, social, family, etc.) and you’ll encounter those that fail to do something properly. Then, instead of owning the issue and just fixing it, they’ll expend great effort to explain why it wasn’t done right in the first place. Even worse, they’ll go to great lengths to explain why it wasn’t their fault.

Don’t be one of those people. Do it right the first time. And if you don’t do it right, then own that and fix it. Forget about the lame efforts to explain the “why.” And especially avoid the temptation to blame someone else. It’s just a waste of time and effort — both for those listening to the explanation and for the person giving one.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

P.S. I will be holding a subscribers-only teleconference on March 13 at 2 p.m. EST entitled “Capturing Huge Gains in a Market Priced for Perfection.” The event is free to attend but you must register here first. Don’t miss out!

In the name of the best within us,

Jim Woods