One week / one topic: (GOP) Party on

Vox populi, vox Dei?

Author

Stefano Amato
December 16, 2024

What happened?

The US presidential inauguration is still five weeks away, but clearly there’s already a new sheriff in town.

President-elect Trump (Time magazine’s 2024 Person of the Year) is moving quickly, with a barrage of cabinet picks and policy announcements which got markets salivating in anticipation.

Once again, Keynes got it right – this time with his concept of ‘animal spirits’:

“[…] a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic.

Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits – of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

John Maynard Keynes

His most recent remarks at the NYSE are worth watching, as they constitute a very clear articulation of the ‘Trump put’: .”…to me the stock market is all of it, it's very important.”

Corporate titans are quickly falling in line – if despite being worth gazillions you are going to bend the knee, you might as well kiss the one ring to rule them all I guess… – investors rejoice and stocks keep reaching new highs.

(Corollary: bonds apparently are for losers Boomers doomers)

An astute trader I know recently posed the question of “whether we can simultaneously have a Fed put and an Executive put – or whether they are eventually mutually exclusive”. (h/t Rich P)

Indeed, pedal-to-the-metal pro-growth radical policies indeed run the risk of stoking inflation once more – and the Fed (in its current form) would have no choice but trying to tame it.

Remember how much fun 2022 was?

Past performance is not a guide for future performance

Our observations

  • Fundamentals: In a way, animal spirits are the negation of fundamentals – so we are left dealing with the former (equities to the moon, bond malaise) while keeping an eye on the latter (expensive US stocks, lender of last resort, etc.).

  • Price action: Despite what feels like a scorching S&P 500 rally this year (+29%), this is ‘only’ in the 81st percentile since 1945. The average annual total return since then is +13%, and 78% of all years generated positive returns. Careful who you pick a fight with…

  • Investor beliefs: Perhaps the most telltale story for the current mood is the one about a Bitcoin strategic reserve. HODL, indeed….

So what?

Assuming that 1) fundamentals don’t matter until they do, and 2) you can’t tell in advance when they will – on balance we want to remain invested across both sides of the book, i.e. equities and bonds.

Since US stocks already account for ~75% of global DM markets and they are currently very expensive, we could not bring ourselves to buy more… and so we recently chose to increase our exposure to equities via a curated basket of Europe-listed stocks with the following properties:

  1. Globally diversified, high-quality companies with positive internal analyst ratings

  2. Trading at a large discount vs US competitors, despite very similar characteristics (perhaps just because they are listed in Europe? Hello, Ashtead)

Furthermore, the portrait of corporate America looks quite different once you look beyond the very largest companies:

At the same time, we have increased duration at the portfolio level to ~5 years to counterbalance the increase in equities via reasonably-priced insurance vs (most) substantial unknown unknowns.

Nobody ever said this was going to be easy…

Mood music: Prince – 1999