By Jack Hough
The Trumpiest of Trump stocks took off for a postelection moon ride, but then quickly fell in line with the market. Trump Media & Technology Group traded 35% higher at one point on Wednesday, but closed up less than 6% -- just like the Russell 2000 index of small companies -- before tanking on Thursday.
An investor who knew the election results ahead of time might have expected a bigger gain for ticker DJT, but not because it's an attractive investment on paper -- just the opposite. The parent company of Truth Social recently had a stock market value of just under $8 billion, which is in the same ballpark as Walgreens Boots Alliance. But revenue last quarter was around $1 million, on par with Shake Shack -- one typical location, not the whole chain.
In other words, DJT is blissfully detached from economic reality, which in the short term makes it the purest of Trump trades.
Conditions could hardly be better for those trades. President-elect Donald Trump had the kind of Election Day that turned MSNBC's pundit desk into a funeral within an hour of Pennsylvania polls closing. Republicans flipped the Senate and appear likely to keep the House of Representatives. It's a red wave, and the first Republican popular vote win in two decades, providing a clear mandate for four years of Plan Trump.
Even if DJT isn't behaving quite as expected, how about piling into Trump trades that make more intuitive sense? Careful there.
For example, you'd think another Trump term would be excellent for oil -- drill, baby, drill, and all that. And sure enough, the Vanguard Energy exchange-traded fund, which tracks a basket of oil and gas stocks, jumped 4% on Wednesday.
But maybe don't bet little Timmy's entire college fund. For one thing, the fund has been a long-term blah, returning 50% over the past decade. Investors made five times as much in an S&P 500 index fund. For another thing, the U.S. is already breaking records for oil production, not just for itself, but for any country, ever.
Crude oil prices have slumped over the past year on forecasts that the world will be slightly oversupplied due to sluggish growth, especially in China, which has also been a rapid adopter of electric vehicles. It's unclear how drill, baby, drill would help energy stocks, whose best spurts of performance have come when crude prices were high and chief executives were promising to remain disciplined on production growth. More production could help lower gasoline prices, but a gallon of regular, which briefly spiked to a pandemic high of $5, on average, in summer 2022, is down to $3.07. That's close to its 20-year average of $2.91, not adjusted for inflation.
Betting against Treasuries would seem like a lock. Either candidate was sure to preside over a humongous deficit in the years ahead. But strategists say Trump's might be humongous-er, especially with a compliant Congress. He is presumably in favor of extending his own first-term tax cuts, and he has campaigned on scrapping taxes on tips, overtime, Social Security, and more.
Big deficits could prove inflationary, which suggests that bond buyers will need to be lured with higher yields, which means prices will have to come down. Already, the 10-year Treasury yield has plumped up to 4.4% from 3.6% since mid-September.
But one thing about a red wave is that Republicans will fully own the economic results of their actions. "It's not going to be long before we're talking about midterm elections," says Keith Lerner, chief market strategist at Truist Advisory Services. "Either candidate doesn't want a recession in the first or second year of their presidency. I also think that the bond market at some point could provide some constraints on what can be done."
Or maybe there will be constraints before the bond market tantrums. "We'd be mindful of pushing the [U.S. Treasury] yield story much further, " wrote the rates strategy team at Macquarie Research on election night. "If there's a surprise coming from Trump in the next few months (at least relative to hyped-up expectations), it will be about fiscal restraint, rather than fiscal irresponsibility. When the market realizes this, long-term UST yields could stabilize or decline."
Elections matter. Voters today are jubilant or distraught, depending on whether things went their way. But election-based investment strategies, even after an Election Day with results as clear as this one, are difficult to get right. Arch Resources sharply outperformed First Solar between the last election and this one, and it wasn't because President Biden tap danced to "Chim Chim Cher-ee" to signal support for coal over clean energy.
For returns, "elections matter, but other factors tend to matter more in aggregate," says Truist's Lerner. "As you go out three, six, 12 months...the business cycle still matters. What central banks are doing around the globe, Middle East tensions, matter. The profits of technology stocks will matter."
Lerner recommends investors stick with shares of large companies because their earnings growth has been better than that of small companies, and they have less exposure to variable-rate debt, should rates rise, and they are more tied to artificial intelligence, which he views as early in its development.
Wedbush Securities analyst Dan Ives predicts $1 trillion in artificial-intelligence-related capital expenditures over the next few years, and a "golden era for deal flow among public and private tech players" following Trump's inauguration.
I suppose we can call those Trump trades. But following them seems a lot like just sticking with a cheap S&P 500 index fund.
Speaking of the index, think of it as a profit-seeking machine that automatically adjusts to new political realities. Celebrate or fret over the election as you like, but let the machine figure out how to make money from it.
Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron's Streetwise podcast.
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
November 08, 2024 21:30 ET (02:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments