Well, there is lots of going on in last week on financial markets. There is a lot to think about, but below I present some of my thoughts.
Financial markets were very volatile on Monday – market was very weak on pre-market trading with futures on S&P500 even at around 2040. Well, Americans were going to sleep and then at morning they woke up when markets were neutral! Finally we are higher than pre Trump era. We would never get to know what reaction would be if Clinton won, but stronger markets after Trump’s winning are strange.
Let’s look on what Trump was proposing (some of this might be a catchy slogan with no realization, but let’s see) and is there any reason for strong market reaction.
The Trump Plan will lower the business tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
Assuming constant multiples on P/E it means upside by around 30%. Let’s take P/E = 20, and EBT = 100, then in one scenario E = 65 and proposed E = 85. Significant growth, which should be visible in dividends (and cash flows).
It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.
Huge potential for big US companies, lots of them owns cash abroad, for example BEN (very strong reaction), AAPL (no reaction, I don’t understand it, as company has more than $200b in cash abroad).
Clinton was about to reduce prices of drugs. Trump want to change Obamacare, but as far as I know there is no proposal. Rebound on drug prices related businesses is huge, just see on IShares Nastaq Biotechnology (it’s good to have GILD and CAH in my portfolio).
Also US Dollar is getting stronger, though EURUSD we can say is flat in 2015-2016.
Looking at commodities markets it is also interesting. Copper is +23% over the last 10 days, but Gold/Silver are rather flat/weaker. Well I assume that Gold/Silver are down due to lower risk, and copper’s growth is not Trump related… as long as U.S.-Mexico border wall will not be made out of copper J
Summing up, Trump is an uncertain and unpredictable choice. On the other hand he is a businessman and investor, so I assume that he understand well what is important for economy. I do not really care about Mexico wall as I am not US citizen/not living in US, but I am interested in economy doing well. We will see, I think it might be a good choice!
Disclosure: BEN, AAPL, GILD, CAH – long