Stocks are Wicked Popular This Year

One of the most popular questions we have received over the past few weeks relates to positioning investment portfolios to capitalize on changes in Washington in the New Year. There are certainly factors to consider with respect to global trade, tariffs, fiscal spending and deficits, inflation and deregulation, among numerous others. Potential policy changes with a Republican-controlled White House and both chambers of Congress are reasonable considerations when forming a multi-year view on asset allocation and portfolio positioning. The key to forming a long-term view, however, is to think strategically, rather than tactically.

Any policy changes (when actually implemented versus merely being considered) will take significant time to be impactful on industries and companies. It is logical to consider, for example, that an aggressive stance on tariffs may weigh on the profits of companies outside the U.S., a decreased regulatory environment may benefit certain companies (e.g., Financials), an inclination to increase domestic oil production may benefit the Energy sector in the short-term, with additional supply likely to weigh on price. These and a myriad of other factors are all worthwhile to keep in mind. What is equally important is resisting the urge to overreact to uncertain changes as a near-term trading strategy.

Speculators have been quick to bid up areas of the market expected to benefit from what has become known as the “Trump trade.”  With history as our guide, these types of reactionary swings are typically short-lived when based on a mindset of short-term “voting” versus long-term “weighing” of company prospects, as eloquently stated by the renowned investor and author Ben Graham. Look no further than the unexpected underperformance of big oil stocks under the previous Trump administration and clean energy stocks under Biden’s tenure. While government policy is a part of a long list of considerations for investors, it is far less influential than other key factors such as monetary policy and interest rate changes, economic cycles and inflation levels. The confluence of these dynamics creates a useful backdrop in which to frame the type of deep dive fundamental research long-term investors must undertake for each company considered for investment, with a focus on identifying those with the highest quality sustainable earnings.