By Brad Lee, CFA Society Minnesota Intern
On Thursday, June 22, 2017 CFAMN hosted Jason Trennert, Managing Partner, Chairman and CEO at Strategas Research Partners. Mr. Trennert is the author of multiple books on investing, and is widely quoted in the press, and is a regular on CNBC and Bloomberg. He shared his perspective on a diverse group of topics including his viewpoint on current economic trends, investing in the Trump era, and the growing discrepancy in the beliefs between the average citizen versus experts in these subjects.
The Base Case
Mr. Trennert is forecasting real GDP growth of 2-2.5% in 2017 and ~3% in 2018. He believes deregulation will focus on energy and financials, and the budget will focus on increases in defense and infrastructure spending. Small business confidence is growing. Therefore, policy changes are believed to help small and mid-sized businesses more than large businesses.
His presentation featured a segment on the greatest story never told. This was the serendipity of the election results in November 2016, coinciding with a turn of positive S&P 500 trailing 12-month Y/Y earnings growth in 4Q’16. This adjustment of increased earnings came after 6 months of negative earnings, which ultimately stimulated the current rally. Mr. Trennert concluded this is perhaps the most unloved bull market of all time since its inception in 2009. The era of low interest rates also may finally be ending. Currently he is bullish on the economy and the market in the foreseeable future.
Four 4 Main Items to Trump Agenda
There were four key points in Mr. Trennert’s presentation he believes investors should focus on, which are highlighted below:
- Increasing velocity of money
- More drilling
- Increased spending of infrastructure and defense
- Tax reform
The last seven years has been a period of easy money but tight regulation. An unforeseen issue with this has been marginal companies staying in business, especially in the retail and energy space. Mr. Trennert foresees looser restrictions on stress tests and increased velocity of money going forward with the new administration. As for the current priority of deregulation and the U.S. exporting more in energy, this will result in more drilling by companies and will benefit companies who are prepared for the shift. However, Mr. Trennert is actually more bearish with lighter controls in the industry. He also specified only three of the NATO members (U.S., the U.K., and Estonia) are spending the expected 2% of their GDP on defense spending. Thus, he is bullish on defense stocks and believes this is a growth industry even in an era of populism and heighted concerns about national security. As for tax reform, he believes there are four major goals for the Trump Administration. It includes tax simplification, flattening the effective corporate rate, shift to a territorial tax system, and encouragement of CapEx spending.
Revenge on the Nerds
Mr. Trennert stated his research in 2016 had been “…actually being in the research” or discussing with others to find their perspectives. Thus, he concluded there is a growing trend of how “average ordinary” people are starting to question experts on investments and the economy. Some of these include the open borders, the Affordable Care Act, low interest rates on savings, and over-diversification of investment accounts.
From an investment perspective, Mr. Trennert is overweight financials, industrials, and technology. He believes small to mid-cap financials have more to gain from deregulation than large caps, and likes technology stocks that as he simple stated, “…do not have triple pricing multiple earnings valuation…” He also believes it’s a good bet there will be a tax cut on repatriated profits and any future financial repression favors passive investing, although active investing will always play a major role in the investing world.