Trump wins a second term … how the markets are moving … get ready for the Fed tomorrow … do we really need another rate cut? … watch out for valuations Congratulations to Donald Trump on winning a second term in the White House. As I write Wednesday morning, the markets are ripping higher, especially the sectors seen as the biggest beneficiaries of Trump’s coming presidency. For example, banking, small-caps, and Bitcoin are soaring. At the same time, green energy stocks, which would have likely climbed under a Harris term, are selling off sharply. Commodities including gold and copper are down as investors mull what Trump’s proposed tariff policies would mean for the dollar. A stronger dollar (the likely outcome of tariffs) would require fewer of those strong dollars to buy commodities, putting downward pressure on prices. Oil was down earlier in today’s session on the same concern but has recouped losses as I write mid-day. Over in the treasuries market, the 10-year yield has popped as high as 4.47% as Wall Street speculates that possible Trump tax cuts and heavy spending will spark economic growth and inflation. Lots of moving pieces here. We’re looking forward to navigating them with you in the days ahead. Though the market is on a sugar-high this morning, we need to be prepared for what might follow… For what that is, let’s go to Thomas Yeung, who is the lead analyst alongside our macro expert Eric Fry. From Thomas’ recent Investment Report update: According to T. Rowe Price, shares of the S&P 500 have underperformed the median by -4.3% in the year after the election. In fact, more than half of postelection years (54%) overlapped a recessionary period. Of course, this might come down to factors like small sample sizes or sheer bad luck. The Great Depression (1932), dot-com burst (2000), and global financial crisis (2008) all accelerated in the year after an election. Twenty-four elections simply aren’t enough for a meaningful statistical analysis. However, we still believe that markets tend to be overoptimistic going into elections… only to be disappointed when campaign promises turn out to cost far more than expected and take far more time to materialize. However, one thing that might mitigate this historical post-election underperformance is the historical outperformance of the market in a rate-cutting cycle. Our technology expert Luke Lango ran the numbers on this. He found that if we can avoid a recession, the market’s three-, six-, and 12-month performance is always positive after rate cuts begin. In such a scenario, the respective returns are: - Three months: +4.0%
- Six months: +9.5%
- Twelve months: +13.2%
Clearly, lower interest rates do a lot of heavy lifting when it comes to juicing market returns. And that’s why what happens tomorrow is important… With barely any time to recover from the election, tomorrow brings the Fed’s November FOMC meeting As I write Wednesday, the traders are putting 98.9% odds on the Fed cutting rates by another quarter-point. Earlier this week, we made a case for why the Fed should do nothing tomorrow. In short, recent trends suggest that the greater risk today is a resurgence of inflation, not a breakdown in unemployment (that risk is even more pronounced with the Trump win). To illustrate, here’s the unemployment rate beginning in July: July: 4.3% August: 4.2% September: 4.1% October: 4.1% And here’s the core personal consumption expenditures (PCE) price index. We’re looking at the month-over-month data for the last four readings: May: 0.1% June: 0.2% July: 0.2% August: 0.2% September: 0.3%. To be clear, we’re not suggesting that the Fed should tighten policy tomorrow. But with the 10-year yield surging this morning in expectation of Trump-fueled economic growth and inflation, do we really need the Fed to further stimulate the economy? Might a one-month breather to evaluate incoming data be wise? Here’s Louis Navellier’s favorite economist Ed Yardeni: If the Fed continues to lower the federal funds rate, monetary policy will most likely stimulate an economy that doesn’t need to be stimulated. The result could be rebounds in both price and asset inflation rates. The latter is certainly underway in the stock market. And this was written before Trump’s win last night. Even if the Fed does cut rates tomorrow, Powell sounds dovish, and the market continues roaring higher, keep your eye on valuations Let’s go back to Thomas: Both sides have run this race on “vibes,” leaving investors hearing only the good parts of both candidates’ plans without any details on how things will run. There is little incentive for either side to give any details on their plans. The result has been a surge in average valuations – a fact Eric and I have been highlighting over the past several weeks. The Shiller PE Ratio, which averages earnings over a 10-year business cycle, now sits at 37.0, its highest level since the heady days of 2021. AI stocks are particularly pricey, with companies like Amazon.com.com Inc. (AMZN), which we recently sold out of the Fry’s Investment Report Portfolio for over 100% gain, trading at 40 times forward earnings. Of course, this unusually large preelection boost will likely be met with an equally significant postelection hangover. When the Shiller PE Ratio was last at this level in December 2021, stocks tumbled 19% over the following year. Remember, all things equal, the higher your purchase price today, the lower your return tomorrow. Below is a visual on today’s elevated purchase price. We’re looking at the S&P’s price-to-sales (PS) ratio. I’m choosing this because corporations can do a lot to manipulate earnings. But sales (revenues) provide a purer reflection of underlying operational strength. Here’s the S&P’s PS ratio between 2001 and today. 
Source: Multpl.com As you can see, the only time this reading has been higher directly preceded a major market pullback. But let’s be clear – with the Trump win, the markets could easily soar 50% - 100% from here. Just remember, eventually, the bill will come due. So, how do we respond? As we’re quick to write after featuring a chart like the one above, our takeaway is not “get out of the market.” But it is “make sure you’re confident about the stocks you own today.” That confidence should come from a combination of earnings, valuation, and future growth potential. Piggybacking off Thomas and Eric, where are they comfortable buying today in light of these three variables? Well, within just the last week, they’ve made two new buy recommendations. Though they operate in different sectors, the driving force behind both is the same… AI. The first is a play on water. The second focuses on natural gas. Here’s Eric connecting the dots between AI and water: “The internet,” as most of know it, sometimes seems like an ethereal, nebulous force that effortlessly zips data and images through the air. We call part of it “the cloud,” after all. But this nebulous force cannot operate without millions of physical servers humming along 24 hours a day inside the world’s data centers. And these millions of servers cannot operate without consuming prodigious volumes of electricity and water. The tech industry’s large and growing water consumption has not yet attracted the same level of attention – or concern – as the industry’s growing energy consumption. But as tech companies expand their data center footprints worldwide, water consumption will become an increasingly challenging issue for them – and an increasingly expensive one. And here’s Eric writing about AI and natural gas: [My new recommendation] might also benefit from a new “wildcard” source of natural gas demand: data centers. These massive computer warehouses could boost natural gas demand by 20% to 45% over the next five years, according to Wells Fargo research. The mid-point of that estimate would be equivalent to doubling the current production from [the area of the country where this company sources its natural gas]. Eric believes that the combination of demand for natural gas (in large part due to AI), and this company’s low valuation mean a 100% gain for this stock is on the table. Meanwhile, a 100% gain for the average S&P company now trading at the second-highest PS ratio in 24 years is a tall order. If you’re an Investment Report subscriber, click here to log into your account to review these new positions. If you’re like to learn more about joining Eric and Thomas in Investment Report, click here. Circling back to the top of today’s issue, congrats to President Trump on another term We look forward to helping you chart the best course for your portfolio to capitalize on whatever is headed our way. Have a good evening, Jeff Remsburg | 
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