Noise is an unintentional sound which is unpleasant, disruptive and at times dangerous. Applying this concept to investments, we characterize noise as the daily change in sentiment which affects stocks, sectors or regions and which is not based on serious fundamental events or announcements. Admittedly, the Trump election is indeed a fundamental change, but there are a dozen different scenarios (bullish and bearish) that can unfold, with almost equal probability. We have been exhausted reading long analyses of what the impact of his policies will be and we have been (virtually) sick watching the daily volatility (rallies and busts) of sectors and stocks, with no new real information. Blindingly following the famous "Trump trade" can be a dangerous path, despite the media and many talking heads promoting it relentlessly these days.
The market has already moved against us in many stocks we own and in our favor in others we thankfully own, as traders are rushing to build positions and exit others. For the European stocks that have been dumped like the plague, such as luxury names, staples and pharmaceuticals, we are stress testing with the worst possible measures to be taken by the new US administration to see what has already been discounted. And indeed, a lot of pessimism is already built-in in the prices of some Consumer names (staples and discretionary) as well as in Healthcare. There are companies that a potential maximum 20% tariff and without the possibility of passing any of the cost to the consumer, will see their profits down by 3-4%. But their share prices have corrected more than 10% already since Trump started showing as a winner in polls. This means that there are buying opportunities for long-term investors in shares that the investment community dislikes "because of Trump".
Our last week's cover title "Boom or Bust" describes best the possible outcomes for the US, under a Trump presidency. The optimistic side is that deregulation will bring more M&A deals, better use of capital and eventually the so-called animal spirits will lead to an explosion of investments. Lower taxes are good for companies and individuals, while tariffs and a massive deportation of immigrants will force companies to bring back production on US soil and at the same time hire more US staff. In this scenario, the US economy will flourish and so will its equity markets, as the rest of the world will bow with humility. The pessimistic side is that all these measures are, first very inflationary and the FED will have to start raising rates, which will eventually kill the equity rally. Second they are potentially damaging to the already high fiscal deficit and government debt. The pessimistic side also is that Trump's unpredictable second term will be characterized by more arrogance, which could lead to gross mistakes. Meddling with the independence of the FED or finding loopholes to bypass Congress and severing international relations could all lead to unimaginable consequences. In these scenario, a boom will soon turn to a bust.
Mr. Trump's first nominations gave us a hint of how controversial his administration can be. He nominated Mr. Gaetz as the Attorney General, a person who has been accused (but not charged) of sexual misconduct and illicit drug abuse. He appointed Mr. Hegseth as the Defence secretary, a US Veteran who has spent most of his recent life as a TV host in Fox News, the Murdoch channel which recently had to pay almost 1bn$ to settle the lawsuits against it for spreading fake news. Lastly, he nominated Mr Rober Kennedy Junior, a Democrat until recently, who has publicly spoken against vaccination. All these must pass through the Senate, and already a few Republicans have voiced concern on all three nominees and doubt that they will be voted. In response, Mr. Trump threatens to use legal loopholes , such as the recess appointments which do not require voting. Or in other words, to force Congress into recess and then appoint whoever he desires. This would be a first blow to the foundations of the US democracy.
US October Inflation was announced in-line with expectations. The headline number rose to 2.6% from 2.3% in September, which had been the lowest level in three and a half years. The monthly inflation rate is still running at 0.25%, which if it stays like this, the headline number cannot approach 2% on an annual basis, which is the FED's target. The core CPI remained relatively high at 3.3%, which was also in-line with the forecasts. Not much progress was observed on rents' monthly growth and insurance policies, but on the positive side no deterioration either.
Chairman Powell dropped a mini bomb on markets, when he said that the FED is in no hurry to cut rates further. We have mentioned that the Trump-trade cannot survive for long, with the bond market focused on the bust scenario, that we analyzed above. Any spike in yields will be bringing equities down. Going back to what Mr. Powell said, it is really strange that he made such a statement, just a few weeks after the FED's own guidance for another cut in December. The US 10-year approached again the 4.50% level, but found buyers and finished the week at 4.45%. The German yield traded in a tight range, with buyers coming in when yields moved higher. The markets' scenario of a Trump-related recession in Europe can hurt the region's equities for now, but it is beneficial to high quality EUR bonds.
US equities made a U-turn last week, with Nasdaq losing 3% and Russell 2000 dropping 4%. The boom and bust scenarios will keep investors on their feet, during a time when valuations are already hefty. Europe was volatile but registered small losses for the week, as dip-buying in beaten down, high quality stocks emerged. Swiss stocks (1.5%) underperformed, when it became known who the new Head of the US Health department will be. Nvidia's results this week could spark a new attempt to move past the 6'000 mark on the S&P500, which for now provided a lot of resistance.
Chart of the Week : Sector performance can vary significantly from year to year.
We have prepared the above chart which shows the performance of each sector since 2019, in Europe. It is obvious that it is very rare for the same sectors to be in the top-3 positions every year and when this happens then the following year that sector usually underperforms the rest of the market. For example Technology had three fantastic years in a row in 2019-2021, but the was one of the worst performers in 2022. The same held for Energy which was the place to be in 2021-2022, but the two years that followed its performance was one of the worst among sectors. And the reverse can hold true. Sectors that have underperformed for two or three consecutive years can come back and have a series of great years, just like Financials, after their 2019-2020 underperformance. Of course we cannot base our decisions on this chart alone, but there is an increasing probability that European Financials and Industrials that had some good years recently will not be able to repeat it in 2025.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week :KSH/FactSet , Photo:
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