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Keep Your Financial Sanity: Tune Out The Media Circus

The post-election rally continues but periodically sputters, as investor optimism gets buffeted by anxiety over the raucous reality show that now passes for politics in America. The daily news more closely resembles The Jerry Springer Show than the workings of a constitutional republic.

How should you trade in the fraught days ahead? Below, we turn to our chief investment strategists for levelheaded advice.

As usual, it’s been a dramatic week. The major indices on Friday hit new highs for the second day in a row, with rising oil prices giving energy companies a big boost. Investors remain encouraged by the business-friendly policies of the new Republican administration. Energy investors on Friday also were cheered by reports that OPEC’s production cut agreement will likely hold as the cartel curtails cheating.

But the broader markets have seesawed in recent weeks, amid a barrage of controversial executive orders, court actions, street protests, stock-crushing tweets, and congressional shout-fests. Given the level of hope on Wall Street, an unexpected shock could quickly sow panic.

To be sure, there’s still enough good news to keep you in the market. The economic recovery is slowing but still rolling along and fourth-quarter corporate earnings have been healthy. But caution should be your watchword. Let’s see what our in-house experts have to say.

The return of animal spirits…

Ari Charney, chief investment strategist of Utility Forecaster, says Wall Street is pleased with Trump’s vows to cut taxes and deregulate, but it’s far from certain that the president can deliver on all of his ambitious promises:

“True, the unified GOP government’s policymaking could reinvigorate growth.

We’re already seeing a rollback in regulations, with the promise of more to come. And corporate tax cuts could also give a big boost to the economy’s job creators…

Rising sentiment presages a return of so-called animal spirits… But while business sentiment may be rosier than it was a little more than three months ago, sentiment is almost always based on what happened in the recent past, in this case promises made during the election.

If the government fails to deliver on those promises or simply moves too slowly in fulfilling them, then that could dampen sentiment.”

Jim Pearce, chief investment strategist of Personal Finance, says current conditions compel investors to change their perspective from top down to bottoms up. As Jim explains:

“A sea change is under way in the stock market, which I believe is about to perform quite differently over the next few years than it has in the recent past.

First, stock prices are at record highs, despite three years of declining corporate profitability. Second, the Federal Reserve is committed to raising interest rates after nearly a decade of keeping them artificially low. And third, President Trump will govern in a manner that is completely unpredictable.”

Jim describes the investment methodology that should guide you in the days ahead:

“Investors who can’t tolerate volatility have two choices. They can either exit the market entirely or adopt an investment strategy that capitalizes on the opportunities that constant chaos creates. This means choosing stocks from the bottom up, with little regard to sector allocation.”

Rather than emphasize sweeping macroeconomic or sector trends, Jim will help his readers pinpoint individual businesses that are poised to benefit from specific circumstances.

The “slam dunks” that never happened…

Predictions that seem like a sure thing have a funny way of being wrong. Former CIA director George Tenet will never live down having described the intelligence on Saddam Hussein’s supposed weapons of mass destruction as a “slam dunk.”

Almost every pollster told us that Hillary Clinton’s election as president was a slam dunk, too. Amid today’s volatile conditions, assume nothing and rely on careful stock picking.

Consider the assumption that Trump will boost infrastructure spending, which has propelled the prices of construction sector stocks. Since November 9, the PowerShares Dynamic Building & Construction Portfolio ETF (NYSE: PKB) has risen 35.9%, compared to 6.9% for the S&P 500.

But here again, Ari Charney counsels caution:

“We’re less certain about the prospects for President Trump’s proposed $1 trillion infrastructure plan. Regardless of what form it takes, infrastructure spending tends to take a lot longer to boost economic growth than tax cuts.”

As details come to light, Trump’s infrastructure plan isn’t the slam dunk for fiscal stimulus that many investors assumed. The proposed program actually is a privatization plan comprising tax breaks and subsidies for utility and construction companies and it’s not designed to directly fund new roads, bridges, water systems or airports.

If history is any guide, some of these construction firms will be Trump-linked entities from his days as a real estate mogul. What’s more, Trump’s infrastructure plan already faces resistance from GOP deficit hawks, who insist on spending cuts in other programs to offset the costs of the tax breaks. Consequently, even when it comes to construction opportunities for investors, there’s that unpredictability Jim Pearce warns about.

Don’t pile into certain sectors, simply because Trump’s rhetoric suggests they’ll be winners under his regime. Everything is subject to change; you must examine the particulars of each stock.

As Jim Pearce puts it: I believe we have transitioned into a trader’s market, one in which almost every stock can go from being a winner to a loser (or vice versa) with little warning.”

Ignore the overheated political rhetoric, grandiose promises, gyrating poll numbers, and daily crises, and stick to the fundamentals that count, particularly corporate earnings reports.

On the earnings front, the news is encouraging.

As of February 10, with 71% of S&P 500 components reporting fourth-quarter fiscal 2016 results, blended earnings growth stands at 4.9%, according to research firm FactSet. So far, 67% of S&P 500 companies have exceeded the mean earnings per share estimate and 52% have exceeded the mean sales estimate. Analysts currently expect earnings growth to continue through 2017.

Focus on the events that count, such as earnings reports, and remember your long-term investment goals. Along the way, our seasoned experts are here to guide you.

Got a question or comment? Send me an email: mailbag@investingdaily.com — John Persinos

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