The election of Donald Trump as President of the United States has significant implications for financial markets, particularly from a Canadian investor’s perspective.

Markets reacted positively to Donald Trump’s election with the S&P 500 and the TSX showing solid gains in the days following the election. At the same time, valuations are at all-time highs with stock prices gaining more than earnings (potential bubble?).

We delve into the nuances of market performance, economic indicators, and investment strategies in the wake of Trump’s presidency. Donald Trump is inheriting a strong economy, will his policies continue this momentum? Tune in to find out.

If you have questions, topic ideas or want to discuss your own investments please reach out, we’d love to hear from you.

Email us at info@towerasset.ca.

Navigating Financial Markets Post-Trump Election: Insights for Canadian Investors

The election of Donald Trump as President of the United States has had significant implications for financial markets, particularly from a Canadian investor’s perspective. We delve into the nuances of market performance, economic indicators, and investment strategies in the wake of Trump’s presidency. This blog post will break down the key insights from their discussion, offering actionable advice and thorough explanations to help investors navigate the changing market conditions.

Market Performance

Surge in Market Enthusiasm

Following Trump’s election, there has been a notable surge in market enthusiasm, with the S&P 500 up by 3.5% (when this was written). This increase reflects a broader sentiment among investors who view Trump’s presidency as potentially beneficial for business.

Implications for Canadian Investors

• Cross-Border Investments: Canadian investors with exposure to U.S. markets may benefit from the bullish sentiment. However, they should also be mindful of currency fluctuations and geopolitical risks.
• Sector-Specific Opportunities: Certain sectors, such as energy and financials, may see more significant gains due to Trump’s pro-business policies.

Economic Indicators

Positive Economic Indicators

We highlight several key economic indicators that paint a positive picture of the U.S. economy:

• Inflation: Trending downwards, with recent figures around 2.6%.
• Unemployment: At a remarkably low 4.1%, indicating near-full employment.
• GDP Growth: U.S. GDP growth rate stands at 2.8% year-over-year, significantly higher than other G7 countries.

Concerns About Stock Valuations

Despite these positive indicators, there are concerns about stock valuations. Stock prices are appreciating at a faster rate than earnings growth, leading to potentially inflated valuations. This raises questions about the sustainability of the current market rally and whether it could lead to a recession or a market correction in the future.

Defensive Posture

There is uncertainty surrounding these developments, and we are not recommending timing the market but instead we focus on maintaining a defensive posture in their investment strategies. This involves:

• Diversification: Spreading investments across various asset classes to mitigate risk.
• Quality Investments: Focusing on companies with strong balance sheets and consistent earnings growth.

Key Takeaways:

• Stay Invested: History shows that the best investment strategy is often to remain in the market rather than attempting to exit at the peak.
• Monitor Trends: Keep an eye on market trends and adjust your portfolio accordingly, but avoid making drastic changes based on short-term fluctuations. If you’re already a client, we’ve got you covered.

Investment Strategies

At Tower we have three investment strategies we employ to help our clients achieve their goals:

1. Momentum Strategy

This strategy involves participating in the upward trends of the market. This approach has yielded impressive returns, with a reported 18.9% return year-to-date.

Key Takeaways:

• Stay Invested: History shows that the best investment strategy is often to remain in the market rather than attempting to exit at the peak.
• Monitor Trends: Keep an eye on market trends and adjust your portfolio accordingly, but avoid making drastic changes based on short-term fluctuations. If you’re already a Tower client, we have you covered.

2. Fundamental Indexing

The second strategy focuses on investing in companies with strong fundamentals rather than those with high market capitalization. This approach aims to provide more diversification and stability, as it prioritizes companies that are generating earnings and dividends.

Key Takeaways:

• Focus on Fundamentals: Look for companies with strong earnings, low debt, and consistent dividend payouts.
• Diversify: Fundamental indexing can provide a more balanced portfolio, reducing the risk associated with market volatility.

3. Dividend Strategy

The third strategy introduced is a dividend-focused approach, which we have recently implemented. The strategy currently offers a yield of 5.83%, which is significantly higher than many other Canadian dividend ETFs.

Key Takeaways:

• Analyze Cash Flow: We ensure the companies in the strategy have strong cash flow to support dividend payments.
• Historical Performance: Historical performance is a good indicator of dividend payouts to gauge the sustainability of future dividends.
• Yield vs. Growth: Balance the need for high yield with the potential for capital growth.

Conclusion

There are potential headwinds that could arise from Trump’s policies, such as tariffs that may lead to increased prices and inflation, which could negatively impact the markets. Additionally, as Canadians there is uncertainty surrounding the renegotiation of trade agreements, particularly the USMCA, which could further complicate the economic landscape for Canadian investors.

Full Transcript

Mark 00:00:00 Welcome here everybody. Thank you again for joining us for Tower Talks. We’ve got a couple or three quick conversations that we want to have with you. And then we want to get out of your way and thank you for your time. So I was going to talk a little bit about this Trump election, whether or not it trumps the market or dumps the market, that’s good. And then, I’m going to take a quick look at performance, and then we’re going to talk about our dividend strategy.

Tarek 00:00:22 Tarek onto the Trump election. All right. Thanks for that. so yeah, Donald Trump got elected as a president, for the United States, unless you’re living under a rock, he probably knew that. Now, what does that mean? Now, if you’ve been paying attention to markets at all for the last two weeks. Yes. And P 500 is up, I think 2.8% TSX is up to something as well. There’s been this Trump base sort of enthusiasm in the market. But what does that mean long term for us as Canadians, as Canadian investors and for you as an investor? Well, there’s a couple of things.

Tarek 00:00:55 Firstly, you know, Donald Trump’s inheriting a really, really strong economy in the United States, at least stats wise. So inflation is coming down. I think the latest numbers are at 2.6, which is trending in the right direction. Unemployment is at 4.1%, which basically means full on full employment in the United States and the US, GDP is at 2.8% year over year, which is the best among poor countries, G7 countries. I mean, Canada is 1.3. Germany is zero. France at 1.1. So the United States has an enviable economy. So he’s inheriting something very, very strong. now, some concerns though, the S&P 500, you know, like I mentioned, earnings are growing, the economy is strong, but stock prices are probably appreciating or actually appreciating faster than earnings are. So we’re seeing you know valuations probably get a little outsized which is a little concerning. So will that translate into a recession or a bubble popping? You know, I’ll tell you the conclusion up front and say we have we don’t know.

Tarek 00:02:05 We’re not going to try and time a recession. But what we will say is, with our exposure in your accounts to the US market, we have been defensive in trying to make sure we, you know, pick companies weighted by that have strong fundamental value to offset the risk of these sort of bubble stocks that may be appearing in the market. Yeah.

Mark 00:02:32 Let me go there for a quick second, Terry. I think I think the thing, given all the good news that we’ve had over the past year and then the Trump win, which business would see as very friendly, there’s probably more now, especially there’s more gap space on the bottom than on the top right of that’s fair of the market. In other words, is there a chance of the market gapping up? Doesn’t usually do that, and probably won’t after the run that it’s had. could it gap down? Yes. In what areas? Probably in the tech areas which have had the biggest gap up over the last year or two. So my let me also say this, we’ve got two strategies that are defensive against a bubble popping and one that rides in the bubble up.

Mark 00:03:25 Momentum is the one that participates in the bubble up. And year to date it’s had an 18.9% return. Like you can’t complain about that. but if any of you as investors are worried about should I get out of this market, we would ask you, as we have in the past, please don’t. We don’t think that’s best for your portfolio. and the reason is you can’t time the top of the market and what you leave off at the top. You’re going to not get back at the bottom, because if you get the call at the top rate, you’re going to miss the call at the bottom because you’ll be celebrating the fact I got it right. I’ve saved all this money at gap down and you’ll right right through the trough. History has proven the best investing is simply to stay in the market. Now, if you are really worried about it and want to do a little bit more protection safety, then you could move across to more of the fundamental indexing. They are more diversified than the momentum.

Mark 00:04:31 Number two, they are oriented to the fundamentals of the company, not the market capitalization of the company. We’ve talked about that before, but what that means is if a company is not producing earnings dividends of book value, then they’re not in the fundamental index. To a great degree. They’re largely left out. So the tech companies that have been running have the fundamental indexes have looked at and wishing for that type of performance, but they haven’t gotten it. Now, as this gap’s down, if it were to gap down, the fundamental indexes will offset that that gap back. The hope in momentum is that we rotate out of the stocks quickly enough on our quarterly rebalance to not ride the thing down. Will we be successful? It’s worked previously. will it work in the future? You know, we’ll just do our best. that the other strategy. So we’ve got these momentum and fundamental indexing and they really do work differently. The third strategy is one that we just introduced. We’re running it in our own accounts.

Mark 00:05:33 and it’s a dividend strategy that has a yield on it. Now tech is going to talk about that. That would be an area where you could move to safety. If you thought this would be something you’d like to be part of.

Tarek 00:05:43 That’s true. And the yield on that currently is 5.83%. I just pulled that up today. We’re reporting on November 14th. That does change. so very strong yields as, as a comparison. Right. So there’s ETFs that, you know high Canadian dividend ETFs. The trade Vanguard’s offering. It’s only at 4.4%. BlackRock’s offering is I think 4.7. So we’re at 5.8. We’re very confident with the the names we have in this this program and that they’re going to continue to pay that dividend yield. you know, we we started this as in, August, I believe. And in addition to that yield, it’s up 9% since then. So we’re quite happy I know it’s a strategy. I’m like, I mean it’s just two months, three months.

Mark 00:06:26 But we should launch a new strategy every quarter.

Tarek 00:06:29 You know.

Mark 00:06:31 it has performed really well in the last quarter. I would say we should talk about the screening and what’s in there. So if you’ll talk about the screening, the conclusion is we’re looking for 12 great stocks that look like this.

Tarek 00:06:49 They, you know, strong dividend yield. Of course. Now we want to make sure though that they have the ability to continue paying that dividend going forward. So we’re looking at their cash flow seeing how that cash flow relates to their expenses and their dividend yield. additionally, we want to confirm that they have a history of continuing that dividend and not cutting it, but increasing it. So that’s included in there as well. So there’s a number of different, factors we’re looking at. Without getting into too many details, we’re definitely looking at balance sheet income statement, just making sure that, hey, this dividend is high and they can keep it that way or increase it over time.

Mark 00:07:25 And some of the example names in there right now are Bella. Bella was a dog in the last quarter.

Mark 00:07:31 Yeah. It’s down. How much?

Tarek 00:07:32 10% I think maybe 15 honestly 15 yeah.

Mark 00:07:36 I own Bell and it’s down 15%, but we’re still up nine and a half in that portfolio. That’s what’s interesting in the last quarter nine and a half even though Bell took a hit. So so you know, what we’re saying is we’re trying to find large cap companies that have a reasonably safe dividend, meaning it’s probability of being maintained as high, possibility of it being increased is good. And the overall portfolio yield relative to inflation is very, very good. So I think we better get off this call. We’re at eight minutes. Eight minutes.

Tarek 00:08:12 Are minutes. Good. You know what I yeah I, I just I just want to say we we said markets are doing good for Trump. Headwinds may be going to be caused by very pro tariff tariffs can lead to increasing prices. Slow down the economy potentially increase inflation. Again if rates start to go back up in response to increasing inflation, I think markets would react very negatively to that.

Tarek 00:08:34 And as Canadians the the new NAFTA, it’s called the Usmca agreement. The free trade agreement between Canada, the United States and Mexico is up for renegotiation again. And I think it’s 26, maybe 27. and he’s America first. He has no intention of making sure that Canadians get a good deal. And so I’m not sure how that’s not how those negotiations will go, but that uncertainty is not going to be good as well. So headwinds, those are the headwinds there. Obviously we don’t know what’s going to happen, but we have your portfolios positioned to to benefit and also be defensive if needed.

Mark 00:09:09 So if you’re feeling like, going a little bit closer to safety, then give us a call and we’ll work on reducing your momentum exposure and moving it across to either the dividend yield strategy or into the fundamental indexing, which should act a little more defensively in that type of a market. I’m done. What do you have to say?

Tarek 00:09:32 I’m done as well. Thank you for tuning in. We’ll see you next time.