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The Trump Paradox: Populism vs Profits

As an investor, you should be concerned about the growing contradictions between national “populism” and basic economics.

Workers in America (as well as in Western Europe) have been supporting angry, insurgent candidates because they want a bigger share of the economic spoils. Their resentments are understandable. However, the math can’t accommodate a rise in real wages with an overvalued equity rally based on expectations that corporate profits will climb faster than gross domestic product.

Trump and his base reject globalization, which again is understandable. Globalization is the source of many social inequalities. However, the free movement of labor, goods and services across national borders boosts corporate earnings, which in turn lifts share prices… which in turn lifts the 401k plans and Individual Retirement Accounts of millions of ordinary investors.

Simply put, it’s a daunting task to please populist voters and stock markets. I examine the ramifications of this paradox for your portfolio.

The futility of wishing and waiting…

Stocks have tumbled in recent days, as it starts to dawn on Wall Street that perhaps President Trump won’t be able to square the circle.

Linda McDonough, chief investment analyst of Profit Catalyst Alert, says frustrated hopes on infrastructure are instructive:

“Investors like good news. They like to buy stocks with good news, and they like those stocks to rise immediately. For a while, this was true for construction and infrastructure stocks.

The price increases of these stocks, affectionately known as ‘The Trump Bump’ may be getting long in the tooth as investors lose their patience waiting for the promised funding to come through….

As the market digests the bitter news that any boost to government-funded infrastructure spending has been delayed, I expect the group to behave more rationally…

Wishing and waiting are poor investment strategies.”

Race to the bottom?

No one fires a starter pistol to announce a correction. This week’s market slide begs the question: has the long-expected downturn finally started?

It would be foolhardy to try and time the day of reckoning, but it’s also reckless to remain unprepared. Below, I’ll unveil a proven hedge that also offers huge capital appreciation.

U.S. stocks since Monday have posted across-the-board declines. Trump’s lack of political juice on Capitol Hill combined with his disastrously low approval ratings are making Wall Street sit up and take notice. Traders now wonder: can the unpopular president deliver on any of his promises? Even his vows of tax cuts, deregulation and fiscal stimulus are being called into question.

Jim Pearce, chief investment strategist of Personal Finance and director of portfolio strategy for Investing Daily, puts it bluntly:

I think a correction is inevitable this year as soon as it becomes apparent Trump won’t be able to deliver on all his promises.”

A possible reprieve for Dodd-Frank…

Among the hardest hit sectors this week has been financial services. It’s increasingly likely that Democrats in the Senate will fight back against Trump’s plans to deregulate financial services. Sen. Sherrod Brown (D-OH), the top Democrat on the U.S. Senate Banking Committee, flatly stated on Tuesday that his party would oppose sweeping changes to Dodd-Frank.

Since November 9, bank stocks have soared as traders expressed optimism that the new administration would repeal Dodd-Frank and other rules that the financial services industry finds onerous. But this week, bank stocks have been tanking.

The health care sector has been getting punished as well, as “Trumpcare” heads for a train wreck. Until there’s clarity about Trump’s legislative efficacy, investors should keep their powder dry.

As Jim Pearce explains:

“To compound matters further Trump frequently contradicts himself when pressed for details on precisely how he will execute his strategy…

Making the legislative sausage is bound to get messy, but by the time Congress finishes, we should have a much clearer idea of what a Trump stock really is and what it isn’t.”

There’s yet another complication. Given the excessive valuations of stocks before the election, and the remarkable run-up since Trump’s surprising win, investors have raised the bar for corporate earnings performance to extremely high levels.

The takeaway: Even if Trump does deliver on his pro-business promises, outsized returns may remain elusive and a correction inevitable. You need to adopt a strategy of defensive growth.

Got a question or comment? Drop me a line: mailbag@investingdaily.com — John Persinos

A shining hedge against uncertainty…

For all the reasons cited above, you need to act now to protect your wealth.

Precious metals are classic safe haven hedges that guard your portfolio from unexpected shocks. Silver often takes a back seat to gold, but that’s shortsighted of the investment crowd. During bull markets for precious metals, silver historically has outperformed gold.

With most analysts now calling for a sharp and sustained rise this year in silver prices, it’s time for you to gain exposure to the “white metal.”

Jim Fink, chief investment strategist of Velocity Trader, has put together a trading system that can leverage small stock movements into triple-digit winners. To exploit the coming explosion in silver prices, Jim has devised a $1 trade that is poised to soar 406% within the next 90 days.

Want to learn more? Watch this presentation.

 

 


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