AMERICA VOTED WITH THEIR WALLETS…

Hate it or love it, President-elect Trump has done it again. According to the exit polls, the working class with household incomes of $50K or less accounted for two-thirds of the vote, although Democrats appealed to households making over $100K

Voters undeniably voted with their wallets while exit polls sighted issues such as the economy, immigration, and cost of living captured the emotions of the financially strapped at the poles. Voters no longer fell for the Franklin D. Roosevelt New Deal-styled jargon that promised to rebuild America but not the Americans in it.

 In 2023, the immigrant population increased by 1.6 million, the greatest increase since 2000. All the while, Americans struggle to keep up with the cost of goods and services, exuberant rents, and increased food, insurance, and energy costs. America rolled out the red carpet for Immigrants and provided social programs like the refugee cash assistance and supplemental social security income.

 The U.S. Department of State also provided local resettlement agencies with a one-time payment of $2,375 per refugee — $1,275 can be used for critical needs such as rent, food, and clothing. The rest are earmarked to fund access to services such as cultural orientation, housing, and legal help.

 And while this is a necessary and very humane approach, this was also a tipping point.

Americans were sick of funding wars and being the world’s babysitters while they were last on the financial totem pole.

 In other words, you can’t keep telling Americans how great their country is when the government is feeding them dog food and pretending its steak because you will leave them but one choice, and that’s to vote with their frustrations.

 While it may come as a surprise to the financial intellectual, there was a bifurcation happening beneath their noses that led the Democrats to talk over the heads of the voters they needed most. It didn’t take a rocket scientist to see there were two economies’ unfolding.

 One existed in the Ivory Tower of Wall Street, and the other in the alleyways of Main Street where inflation outpaced wages and rent became the 800-pound gorilla as shelter accounted for two-thirds of the consumer price index (CPI) and inflation was still 20% higher than before the pandemic. But even so, Wall Street kept exclaiming that the consumer is strong while turning a blind eye to shelter costs that were taking between 30% to 50% of the consumer's income and credit card debt of 1.17 trillion, the highest on record.

And while we haven’t experienced two negative quarters of Gross Domestic Product - which would classify the U.S. as being in an official recession, no matter how Wall Street tried to sugarcoat it, the consumer was experiencing a recession that didn’t need an analyst from Wall Street to inform them that their dollars were buying less food and paying covering less rent, while in a death match between corporate greed and survival.

 This is important because not since William McKinley the Nation’s 25th President has an incumbent President won re-election while the country was in a recession.

 Although we aren’t in an official recession, Main Street is experiencing a squeeze on their wallets while Wall Street is trying to squeeze out more profits which caused a recession mindset to show up at the poles, i.e. Trump!

IS TRUMPS’ STOCK MARKET THE NEW WALL STREET UTOPIA…?

In the words of the renowned Wharton finance professor Jeremy Siegel, “Trump is the most pro stock market president in history”

 I agree but only to a certain extent and I will tell you why.

 In Trump's first term, he slashed the corporate tax rate from 35% to 21% by signing into law, The Tax Cuts and Jobs Act on December 22, 2017. He also decreased the tax burden for American households and increased the child tax credit. During his 2024 campaigns, he promised to lower corporate taxes yet again to 15% as he stated that his original tax cut in 2018 spurred growth and paid for itself.

 Even though the CBO (Congressional Budget Office) said it would increase the deficit by 1.8 trillion over ten years or by about 2.25 trillion including interest in additional debt, even with the additional growth in the economy Trump’s plan wouldn’t offset the deficit by that much as it would still increase the deficit by about 1.3 trillion or by 1.9 trillion including interest on additional debt.

In the back of my mind, I hear Allen Iverson in my Trump voice saying, “What the heck; aren’t we are growing? What are we talking about? Balanced budgets?!!!”

 In theory, corporate tax cuts spur growth because corporations now have more money to invest in research, innovation, building factories, and more importantly, talent, which also means higher wages and a healthier consumer.

 Now with that being said, Wall Street loves a strong consumer, but they love a low interest rate and tax cut environment even more.

 And just like Ronald Reagan, Trump believes in less regulation which opens the door to free enterprise giving way to more deal flow: Initial Public Offerings, Mergers and Acquisitions, as well as an environment that’s ripe for an increasing entrepreneurial spirit.

 But the question is, will Ronald Reagan’s supply-side and trickle-down economics work in an environment where the consumer has lost confidence in their government body and the corporate structure?

 Main Street already believes that corporations are greedy and will not pass on the savings to the consumer, but instead fatten up their balance sheets due to the increased scrutiny by Wall Street financial analysts for corporations to grow both the top and bottom lines.

 Add to the fact, that we could be entering a huge inflationary environment if Trump's 60% tariffs on China and 25% to100% tariffs on Mexico take effect because corporations will simply pass on the increases to the consumer.

 Not to mention, the Fed's dual mandate (Low unemployment, Stable pricing, and 2% Inflation) and the lowering of the Fed fund rates while their balance sheet is still 2.823 trillion above the 4.171 trillion pre-pandemic balance sheet which now sits at 6.994 trillion

 This in itself is inflationary now add more corporate tax cuts and a 3% Fed funds rate to the mix, in my earlier Wall Street days in the capital markets we called this broker Disneyland because tax cuts give the corporations more money and a low-interest rate environment puts more capital in both the hands of the consumers and Wall Street.

 Now speaking of Wall Street, under a Trump Presidency there will be some notable winners.

Like the financial sector, due to increased profits, lower borrowing costs and increased loan activity on both the business and consumer sides.

Growth stocks will be a huge beneficiary creating an opportunity for above-average growth where the hindrance of high-borrowing cost is non-existent. The ability to invest, expand, research, and innovate can give them a competitive edge.

The entire energy sector will get a boost from a deregulatory environment as Trump is pro-oil, natural gas and coal, as well as maintaining American jobs and his America 1^st agenda of increasing our energy independence as the number one producer of oil and natural gas in the world.

Cryptocurrency is already seeing a huge boost at the thought of a crypto-friendly government as Trump has pledged to start a bitcoin reserve.

 And of course, the Defense sector and Artificial intelligence will get a boost as it infiltrates almost every sector from tech to healthcare to utilities as more electrical capacity is needed for data centers in the race for AI dominance under Trump.

The losers will be sectors that may be adversely impacted by the rollback of policies from the previous administration.

While there is the huge potential for inflation, Wall Street loves its candy and the grandiose visions of increased profits will more than enough to offset the risk of skateboarding on inflationary razor blades, i.e. a trump market!

THE DATA IS THE ONLY THING THAT MATTERS

I have coined a phrase that my investments live and die by and that’s, “The data is the only thing that matters." So, looking at the macroeconomic climate each week is as crucial as listening to a company's earnings call.

One of the most important monthly economic reports is the CPI (Consumer Price Index) report. This is a crucial gauge for inflation as it measures the change in prices paid by consumers for goods and services over time. The report breaks into two parts, Core CPI and Headline CPI.

Core CPI excludes food and energy and provides a clearer picture as prices for both are volatile. Headline CPI includes all items, including food and energy. One of the highlights and key data points to watch is shelter, which rose .4% in October, but more importantly, was over 50% of the increase in the CPI.

 This means that shelter is what’s causing most of the inflation as the consumer according to a Harvard study is paying upwards of 30% of their income on shelter. Shelter is a sore point in the inflation picture because as of today it is cheaper to rent in all 50 states than it is to buy a home. And if this wasn’t bad enough the likes of Blackstone, Morgan Stanley, and Goldman Sachs are officially in the single-family home buying business.

This is a credible threat to homebuyers and shelter inflation because as long as there is a low supply, rents will stay elevated, which makes for a very profitable investment for Wall Street.

So much so, they were willing to pay all cash and over-list price as they anticipated premium rents created a measured risk. This created a spike in housing since the average consumer couldn’t compete in a bidding war against Wall Street’s colossal institutional money.

This strategy works well in a low supply, elevated rental environment, but when the market turns this could age very badly. Institutions often securitize their mortgage portfolio, known as mortgage-backed securities, where the cash flow from rents services the loans and the margin between the cost to service the loan and rents make mortgage-backed securities attractive.

The strength of this investment relies on a macro-environment where home ownership is unobtainable due to high rates and elevated home prices. I see this as a big issue and it’s not a matter of if— it’s when the market shifts.

Now here's the rub— the Feds are at the beginning of an easing cycle with a target Fed fund rate of 4.5% -4.75% by year-end 2024 and 3.00%- 3.25% by year-end 2025.

 In 2023, there was a record of 450k multi-family homes completed, which was the highest number of multi-family home completions since 1987, which means more supply to the rental markets in 2024, and the combination of an easing Fed could spell trouble in terms of margins for Wall Street investors in the coming year forcing them to sell their portfolios and look for better-performing assets.

This could create a supply issue and potentially depress home prices, as well as the rental market. This would have a positive reverse impact on the consumer as home prices drop and the market normalizes. The only monkey wrench in this scenario is if inflation rears its ugly head; this would cause the Feds to pause or maybe even raise rates.

 Next up is the Producer Price Index (PPI), which comes out the day after the CPI and is just as important as it indicates the price producers receive for their goods. Like the CPI, the PPI has both a core PPI and Headline PPI. This index is closely watched because if the producer's prices are on the way up this will be seen as inflationary, which means producers will pass the increase in cost on to the consumer.

The PPI hit 3.1%, 1/10 above expectations; not enough to derail the fed's agenda but enough to slow them down.

 This means we will have some volatility in the bond market as the street gets nervous at the sight of a hawkish Fed, potentially leading to a selloff in equities.

Now, keep in mind that the bond market is a constant competition with the equities market because it’s a never-ending battle for capital and alpha, better known as percentage gains. We can see this threat in the rising 10-year treasury and short-term, 2-year treasury if the bond market suspects inflation could come back under Trump. The yield curve will flatten or even invert once again. The yield curve inverts when the 2-year treasury yields are higher than long term yields, specifically the 10-year treasury.

 Rising yields suck capital out of a volatile equities market because investors seek safety in the bond market. If the threat of inflation subsides, then yields will back off and equities will become more attractive. Now keep in mind that the feds are perched on the window seal, watching for any adverse sign of a trend reversal as they are data dependent.

 So, the market will try to anticipate the Fed's next move based on the weekly and monthly macroeconomic data as it tries to forecast what the next 12 months ahead looks like in a Trump stock market.

EARNINGS REPORT CARD…

As a financial coach, I have to manage expectations, but I refuse to manage emotions; therefore, everything we do in the market should be based on data, and what better way to measure the companies in our portfolios than by their quarterly earnings—or as I love to refer to it, their quarterly report card. It is mandatory that if you are an investor you listen to the earnings calls of the companies you own and bellwether companies or industry titans. This is a great way of reading the tea leaves and gaining a healthy helping of conviction needed in a turbulent market.

 According to FactSet Data, we are approaching the end of the earnings season. As of November 8th, 91% of all companies in the S&P500 have reported.

• For the third quarter of 2024, 75% of the S&P500 have reported an earnings surprise.

• For the third quarter of 2024, 60% of the S&P500 have reported revenue surprises.

•  For the third quarter of 2024 S&P500, if it stands the blended year-over-year revenue growth, is 5.3%, which would mark the fifth consecutive year-over-year quarter earnings growth.

 On September 30^th , the estimated earnings (year-over-year) growth rate for the S&P500 in the third quarter was 4.3%.

 269 companies issued earnings guidance for the fourth quarter. 130 S&P500 companies have issued negative EPS earnings guidance. 139 S&P500 companies issued positive EPS guidance; 52% reporting positive guidance.

 Guidance is extremely important and, in most cases, more important than the actual earnings beat because Wall Street wants to know—what have you done for me lately?— because yesterday is gone forever. In terms of valuation, the forward price-to-earning (PE) ratio for the S&P500 is 22.22.

 This is very important to understand because the price-to-earning (PE) conversation centers around whether a company is overvalued or undervalued based on the PE.

I'm considered a growth investor and often clash with the traditional way Wall Street values a corporation. Simply, the question that leads me down the rabbit hole is, what are you willing to pay for a company growing their revenue above the market average growth rate? and, shouldn’t you pay a little premium for growth?

Without digressing, if you look at historic PEs and compare them with the current forward PE of the S&P500 for 2025 of 22 times earnings although we are a little inflated we are in the middle of a major technological shift.

S&P 500 historic PE:

• The 5-year average PE is 19.6

• The 10-year average PE is 18.1

• The 15-year average PE 16.4

• The 20-year average PE is 15.8

• The 25-year average PE is 16.4

As a growth investor, I find it hard to find a solid growth company with a PE below 19, and I will tell you why. Because typically you pay a premium for growth. Take a look at the Price-to-earnings ratio for all 11 sectors of the S&P500, except healthcare at a PE of 18.5, real estate at a PE of 18.8, utilities at a PE of 18, and financials at a PE of 17. The fastest-growing sectors are information tech and communication services. Trading with a PE of 30.3 and communication service trading at a PE of 19.4.

If I listen to the typical analysts or fund manager who doesn’t beat the market, they will say even at these levels the PEs are way too high.

S&P 500 Sector PE:

1.  Information Technology: 30.3

2. Materials: 20.7

3. Industrials: 23.5

4. Consumer Discretionary: 27.1

5. Consumer Staples: 20.9

6. Communication Services: 19.4

7. Real Estate: 18.8

8. Healthcare: 18.5

9. Utility: 18.0

10. Financials: 17. 0

11. Energy: 14.4

 Now every year Wall Street analysts get together and project how much the S&P500 companies are going to earn as an aggregate total. For the full year 2024, analysts are projecting $239.69, and $274.59 for 2025. Wall Street as a whole, is big on the actions of a company matching their guidance so, this quarter they are punishing companies that are missing earnings to the tune of -2.9% and they are rewarding positive surprises by an average of 1.3%.

 Regarding the S&P, seven out of 11 sectors are reporting year-over-year growth.

 The biggest growth came from—Information technology 12.4%, Health care 10.3%, Communication Services 9%

• Analysts are projecting earnings growth of 12.2% and revenue growth of 4.8% for the fourth quarter of 2024.

• Analysts are projecting earnings growth of 9.4% and 5.1% revenue growth for the calendar year 2024.

• For the first quarter of 2025, 12.7% earnings growth and 5.3% revenue growth.

• For the second quarter of 2025, analysts project earnings of 11.9% and revenue growth of 5.5%.

• For the calendar year 2025 14.8% earnings growth and 5.7%.

• For 2025 analysts' S&P 500 target is 6,444

 As a practice, it’s important to measure the performance of your companies. It’s the only way to decide who gets to seek permanent asylum and who gets deported.

_{THE GREAT RED SWEEP…}

 November during a presidential election is typically the most bullish month of the year. The question that has the most gravity is, historically, how does the market perform during a republican presidency versus a democratic presidency?

Well here you go. Typically, democratic presidents beat republicans in terms of percentages. According to Retirement Researcher, from the period of 1926 to 2023, we’ve had 47 years of republican rule versus 51 years of democratic rule. The average annual return of the S&P500 index during a republican presidency was 9.32% versus 14.78% during a democratic presidency. 

Now before you rush to judgment and jump out the window, you must look at the specific periods in which each President was in office. For example, republican president Calvin Coolidge saw an average annual return of 30.57%, but that was during the Roaring Twenties, before the Great Depression. 

 The second closest was another republican, president Ford at 18.44% during the period of August ‘74 to August ‘76, and the third was democratic president Bill Clinton, between the period of January ‘93  to December ’00; the average yearly return was 17.20%, but I feel compelled to remind you that there is money to be made in all markets if you know where to look. 

So here we sit with a Red sweep. Trump controls the White House, and the republicans have control of the House and the Senate. So, the question remains is, how exactly does the market perform during a unified government or when one party has control versus gridlock? According to Retirement Researcher, during the same period of 1926 to 2023, the score was 49 divided governments versus 49 unified government periods. The average annual percentage during a unified government was 14.14% and during a divided government, the average annual percentage was 10.18%. So, while the republicans have done far worse than the democrats while in office. Historically, a unified government has produced fruit.

In fact, a unified Republican government has outperformed a unified Democratic government by 14.52% compared to 14.01%; when divided, the Democrats crushed the Republicans by 9.33%. 

Democrats have a 16.63% average annual percentage return versus the Republicans with an average of 7.33%. So, based on the data, it screams a unified republican government will make us more money. Now the rest is up to Trump, grab your popcorn! 

Thank you for reading and again please share with your tribe.

Kevin Davis Founder Investment Dojo and Author of The C.R.E.A.M. Report