McMurtry Investment Report – December 2024

Can the Trump Stock Market Bump continue?

Since Trump and the Republicans won the federal election about a month ago, domestic US equity markets have risen sharply. It is interesting to note that Trump uses the stock market as a measure of how well he is doing. On this measure, he is doing well so far.

When Trump was first elected in 2016, many investors were so fearful that they initially refused to invest their capital in US stocks. I found that response crazy. Regardless of who gets elected, it is essential that you forget your individual biases and invest your capital according to the current outlook. If you had remained in cash for Trump’s first term, you would have regretted your decision.

Trump’s upcoming mandate incorporates the following:

Lower corporate and individual taxes

Much less government regulations in all industries

Substantial reduction in government spending

Open up the cryptocurrency market

Introduction of punitive import tariffs on all countries including his allies

Removal of subsidies for both EV vehicles and solar panels

Less federal government intervention in oil and gas drilling and in pipeline expansion

Deportation of an estimated 21 million illegal immigrants

Not all of these above factors are pro business, especially the introduction of punitive tariffs and the potential deportation of illegal immigrants. Many economists are perplexed by Trump’s focus on punitive import tariffs as they will result in higher inflation for both the US consumer and US corporations. There is also a high probability of retaliatory import tariffs imposed by other countries that will increase global inflation and reduce the demand for US goods and services.

Although Trump continues talking about import tariffs, many economists believe he is using this threat as a negotiating tactic to accomplish other objectives like forcing their trading partners to increase spending on border control monitoring and pay for a greater share of their defense budget.

Current Economic Environment and Outlook

US employment growth remains strong and this bodes well for consumer spending that represents more than 2/3rds of the total economy. Consumer sentiment, measured by the University of Michigan, recently hit an 8- month high rising for the 5^th consecutive month. Domestic inflation growth remains in a downtrend despite the slight uptick over the last month. The Federal Reserve is still expected to reduce the discount rate once more before pausing early in the New Year.

Industries and Equity Sectors that are the most affected by the election of Trump

The biggest beneficiary is the financial sector that is expected to see much less government regulation and an increase in M&A activity. Less regulations means that the banks will have much greater leeway to increase their lending activities without having to continuously meet strict government regulations and mandates.

Trump has expressed real interest in the cryptocurrency market, especially bitcoin. The opening up of this market accompanied by less government intervention by the SEC is resulting in a sharp increase in the demand for bitcoin.

Another equity sector that is benefitting from the upcoming Republican pro business model is the Industrial sector. Lower taxes and interest rates in conjunction with the long term need to upgrade the domestic infrastructure are major tailwinds.

Despite Trump’s friendship with the Energy Industry, his drill baby drill philosophy will be largely ignored by the producers. We all know that an increase in production leads to more supply and lower prices. However less government regulation will make it easier for an increase in pipeline development and more capital directed to natural gas and LNG production.

What can go wrong with Trump’s policies

If implemented to the extent that Trump is talking, tariffs will be inflationary for the US economy and hurt both US consumers and US corporations. Retaliatory tariffs implemented by other countries will hurt the competitiveness of US exports. Import tariffs imposed by all countries will slow global economic growth.

Currency Devaluations by the US’s trading partners will even the playing field somewhat as long as the extent of the tariffs is not as high as Trump’s initial threats.

The deportation of up to 21 million illegal immigrants will create another labour shortage in the US which is inflationary. I assume that most of these illegal immigrants are working, doing menial jobs that most Americans would not do.

Conclusion

The euphoria created by the thought of lower taxes and less regulation will probably propel the US equity market higher well into the New Year. This honeymoon phase will lead to a broadening out of the market away from high Tech companies into Cyclicals like Financials, Industrials, Reits and Consumer Discretionary sectors in addition to small and mid cap stocks as well. Commodity sectors like Energy and Materials are having to face a lot of headwinds from a global surplus of oil and a much weaker Chinese economy slowing demand for base metals. The strength of the US dollar globally is another headwind for commodity producers making their prices for their commodities produced much higher in local currency terms.

In regards to bitcoin, I am still recommending a small holding of 1% of your total equity holdings. The CI Galaxy Bitcoin ETF, BTCX.U.TO  in US $ is my bitcoin investment choice. This ETF trades in US dollars but trades on the TSX Canadian exchange.  As this does not pay a dividend, I only recommend it in the Growth portfolio.

Further interest rate cuts by the Federal reserve will also help and create a more favourable positively sloped yield curve for the banks to make money.

A further expansion of the PE multiple of the market will make the market even more overvalued than it is already. Currently the expected growth in the S&P 500’s EPS should keep the PE forward multiple from expanding too quickly, but any reduction in the projected growth rate of EPS will be met by a market correction. This type of correction is referred to as a market valuation one and is not because a recession is upcoming. It is simply a value correction in an ongoing bull market. This type of correction happened in 1987.

Based on all these factors indicated above, I am increasing the equity weight by 5% for both portfolios and reducing the cash weight by the same amount. I am also adding a 3% weight to both the US 0-5 year US Treasury real return bond ETF, STIP-US as well as the 3-7 year US Treasury ETF, IEI-US.

At the same time, I am changing my North American benchmark percentage equity weight from 65% US 35% Canadian to 75% US 25% Canadian. A further devaluation of the Canadian loonie is likely to a projected level of 67 cents from the current 71.4 cents per every US dollar. The Canadian economy is much weaker than the US one and interest rates are expected to fall more than in the US. Any punitive US tariffs could drive the loonie down even more if fully implemented.