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Eyeing Congress for Momentum? You’re Looking in the Wrong Place

Stocks moved higher Friday, on optimism that Trump will get his tax code overhaul through Congress. But Washington remains divided and tax cuts aren’t a slam dunk.

If you’re looking for tax legislation to boost your portfolio, you’re missing the real story. Consider the big gainers on Friday. These stocks are on track to perform well no matter what happens with fiscal and monetary policy.

As the president struggles to implement his agenda, you must question the label of “Trump stocks.”

Can investors really pinpoint which companies benefit under Trump? Yes, it’s possible. But you must tune out the narratives that steer you in the wrong direction. Below, I examine the one sector that you can truly call a Trump trade.

First, let’s do the numbers.

Friday Market Wrap

The three major indices rose as prospects improved for tax cuts:

  • DJIA: +0.71%, to 23,328.63
  • S&P 500: +0.51%, to 2,575.21
  • Nasdaq: +0.36%, to 6,629.05

Friday’s Big Gainers

  • Dover (NYSE: DOV) +6.09%

The industrial electronics maker reported strong third-quarter results.

  • Under Armour (NYSE: UA) +5.93%

The clothing brand launched a free subscription delivery service.

  • PayPal Holdings (NSDQ: PYPL) +5.53%

The digital payment player reported a better than expected third quarter. 

Friday’s Big Losers

  • Celgene (NSDQ: CELG) -10.76%

The biotech firm pulled the plug on development of a new Crohn’s disease therapy.

  • Procter & Gamble (NYSE: PG) -3.68%

The consumer goods giant reported lackluster operating results.

  •  Schlumberger (NYSE: SLB) -2.09%

The oilfield services firm warned of a slowdown in the energy patch as prices languish.

The ultimate Trump trade…

Under Trump’s hawkish foreign policy, defense stocks face a bonanza. They don’t need fiscal or monetary stimulus to thrive and they should weather the correction that’s coming down the pike.

The Pentagon is a client with deep pockets that will only get deeper. Global defense spending soared in 2017 for the third straight year. The Trump administration promises huge additional increases in defense.

Meanwhile, America’s allies are spending more on defense. They worry about getting abandoned by the Putin-admiring president.

The U.S. generates more foreign sales of weapons than any other nation. One of America’s fastest-growing military exports is aircraft. Combat airplanes account for one third of global arms transfers. U.S.-based manufacturers top the list of sellers. Military aircraft maker Boeing (NYSE: BA) has been on a tear this year and jumped 2.18% on Friday.

As tensions rise in regional hot spots, emerging nations are buying U.S.-made aircraft. These aircraft can’t fly without U.S.-made components. This role protects defense companies against the ups and downs of the economy.

The “FANG” stocks comprised of Facebook (NSDQ: FB), Apple (NSDQ: AAPL), Netflix (NSDQ: NFLX), and Google parent Alphabet (NSDQ: GOOGL) hog the spotlight. Aerospace stocks don’t get the same attention, even though they boast advanced technology. Apple’s iPhone is a cool gadget, but its capabilities pale in comparison to a fighter cockpit.

Aerospace is a strategic national investment. A country’s standing in aerospace helps determine its economic competitiveness. No country dominates global defense like America. That makes U.S.-based defense companies well-suited for your retirement portfolio.

This Day in History: OPEC Gets Tough

On October 20, 1973, the Organization of Petroleum Exporting Countries (OPEC) banned oil exports to the United States. This move followed the outbreak of the Arab-Israeli war. Back then, OPEC had a lot of clout. The cartel could make nations quake with its decisions. How times have changed.

American energy firms this year continue to produce apace. That’s a sharp stick in the eye of OPEC. It’s also a bane for energy equities.

The Arabs have a proverb an American shale producer could appreciate: “All sunshine makes a desert.” It means too much of a good thing can bring negative results.

North America’s embarrassment of oil riches comes to mind. Fracking has become more efficient, lowering the breakeven threshold for producers. It’s now more profitable to continue pumping oil. But the net effect has left global markets sloshing with an excess of cheap crude. The dynamic weighs on oil prices and the bottom lines of indebted energy companies.

With energy prices trading in the stubbornly narrow range of $45-$50 per barrel, the number of expected bankruptcies in the energy sector this year is growing. Your smartest strategy is to look for energy stocks with the lowest ratios of long-term debt-to-equity. They’re less vulnerable to oil price swings. They’ll also grow the fastest when energy prices bounce back.

Saudi Arabia launched a price war in 2014 by opening its spigots. The House of Saud’s goal was to drive U.S. shale producers out of business. The unintended consequences remind me of another proverb, this one of English origin: “He who laughs last, laughs longest.”

Number of the Day: $1.7 trillion

Total world military expenditures rose to $1.7 trillion in 2016. They’re on course to rise again in 2017. Those are the latest numbers from the Stockholm International Peace Research Institute.

America’s defense budget represents 40% of total global defense spending. Since the terrorist attacks of Sept. 11, 2001, more than $9.3 trillion has gone to the Pentagon.

Trump’s tough foreign policy guarantees an expanded military. Meanwhile, China’s defense budget in 2016 was $146 billion, an increase of 11% from 2014. China plans to boost military spending by another 7% this year.

The surest way to make money is to tap trends with momentum. Ballooning defense budgets are an unstoppable force.

Many of the president’s policy goals are collapsing. The idea of a Trump trade is losing its punch. But if such a trade exists, it’s defense.

 


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