Dear Fellow Investors,
During our discussions with clients in October we were asked repeatedly what the outcome of the Presidential election would do to our investments. Regardless of the outcome, our answer was always the same. In our opinion, whoever was elected in 2016 was going to be the luckiest person to hold the seat since Ronald Reagan. Our belief comes from the emergence of the largest population group forming households like boomers did in the 1980’s. See the chart below1:
Now that Donald Trump has been elected, the stock market is executing a repricing of the perceived winners and losers. To help you understand how lucky Trump was and how lucky he could end up being, we are calling on the progressive rock group, Emerson, Lake & Palmer and their song, “Lucky Man”:
“He had white horses and ladies by the score
All dressed in satin and waiting by the door
Ooh, what a lucky man he was
Ooh, what a lucky man he was”
In his life, Trump has had “white horses” (cars, planes, etc.) and “ladies by the score.” Even before Trump was elected we believe that women between 30 and 45 years of age have initiated a baby boom in the U.S.2 With the arrival of babies, new parents will need today’s “Fort Knox” stroller and a vehicle that fits car seats, the stroller, two adults and all the rest. Next, you need a house, despite the most severe shortage of them in relation to population as any time since the early 1980’s.3
“White lace and feathers, they made up his bed
A gold covered mattress on which he was laid
Ooh, what a lucky man he was
Ooh, what a lucky man he was”
President-elect Trump starts with an investment bed of “white lace and feathers.” He will start his term with historically low interest rates (even as they move up) and U.S. Household Debt Service Ratios at 37-year lows. Energy prices are down and we think they will remain down for years, which will “feather” a millennial-led economic recovery. Trump has a history as a risk taker and anything that changes the attitude of 25-40 year olds associated with taking risks should be a positive.
Trump follows a two-term President who had very little experience with the profit and loss statement of a business as either an owner, employer or employee. Trump will be assisted by a pro-business Congress in the hands of a Republican majority. He comes in at the height of banking regulation and very high investor skepticism. The U.S. spent eight years trying to emulate European socialists, and it is President-elect Trump’s job to change the psychology of business and create a “gold covered mattress.”
“He went to fight wars for his country and his king
Of his honor and his glory, the people would sing
Ooh, what a lucky man he was
Ooh, what a lucky man he was”
Mr. Trump appears very leery to flex the war-fighting muscles of the U.S. and is instead interested in furthering the financial circumstance of average U.S. citizens. Staying at home on the world stage saves money. On the other hand, Donald Trump appears to have a great memory. Other than Peter Thiel of PayPal founding fame, almost nobody in tech-land supported President-elect Trump. We remind you of the bifurcated set up in the S&P 500 Index based on the forward price-to-earnings ratio quintile breakdown4:
Much like when the tech bubble burst in March of 2000, there has been a mad dash to sell the overpriced high-tech favorites in the trading sessions since Election Day. Simultaneously, investors are quickly trying to rectify the underinvestment in economically sensitive shares of financial service companies, consumer discretionary shares and recently reviled healthcare shares.
As long-duration owners of high quality companies priced at a big discount to the S&P 500 Index, we relish the future. Our vision of a much stronger economy over the next ten years has been reinforced by the change in leadership and power in the federal government. If the demographics play out as we expect, Trump could be very “lucky” like President Reagan, and leave office with some “honor and glory.”
Warm Regards,
William Smead
1Source: BofA Merrill Lynch “Tracking the U.S. Consumer, September 16, 2016
2Source: The Wall Street Journal
3Source: ISI Group as of 7/31/2016
4Source: ThomsonReuters Baseline, Smead Capital Management
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
© 2016 Smead Capital Management, Inc. All rights reserved.
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