I think it is required that I highlight some of the recent news going on in the United States right now with racial inequality and police brutality with respect to the markets. It is incredibly sad to see loss of life and the poor treatment of others. It is a highly emotional time for so many people and leadership plays an important role in the healing of social wounds. I hope that the best leaders will rise and cause others to act as leaders. In reality we are all leaders and need to lead each other. Further, I hope that this dark period in our history acts as a catalyst for people to no longer tolerate intolerance.

Leadership is a topic worth noting. There is a stark contrast amongst the leaders and their messaging. President Trump is taking a hard lined approach while former president Obama is taking an empathetic approach. Presidential hopeful Biden is opposing Trump’s hardlined approach. Prime Minister Trudeau has avoided commenting on President Trump’s words and actions.

As a leader myself, personally I am critical of Trump’s lack of empathy and his focus on authoritarianism and control. I believe in leaders who promote unity and equality while giving everyone an opportunity to work hard and benefit because of their hard work.

There are many things going on today. We are still in the middle of a pandemic. There are US presidential elections in November. There is a trade war with China heating up. Canada just ratified the new NAFTA, USMCA, agreement on March 13, 2020. It has already been ratified in Mexico and the United States.

Trump has always been a polarizing figure and he’s been taking a lot of heat over his handling of COVID-19. Now he’s faced with a major social crisis. He’s always been polarizing, he just declared himself a war-time president over COVID and now he calls himself the president of law and order.

This is a heavy handed way to deal with opponents however it is consistent with his past behaviour. 

With all the social unrest going on, the stock markets are continuing to rise. The main thing that the markets are focusing on is economic production. Will the protests affect economic production over the long term and it be enough to re-price stocks? The market doesn’t think so.

The market is pricing in an economic recovery that includes increased efficiency for publicly traded companies. The S&P500 is about 25% information technology, think Microsoft, Apple, Amazon, Facebook, Alphabet formerly Google, etc. Underneath the surface I believe there is a sector rotation happening. The information technology stocks are slowing while industrials and financials are rising. There is a lot more value in those sectors with lower price to earnings and price to book value. They are still down considerably year to date while other sectors are up. The tech heavy NASDAQ is now positive for the year.

As a result I sold the Canadian utility stocks at the end of May and bought US industrials. I still think Canada has structural issues with it’s highly leveraged Canadian consumer and as a result I believe many stocks on the TSX will likely be held down by association. This can be seen with the S&P 500 outperforming the TSX in both April and May.

As the leadership in the stock market sectors begins to change it makes me wonder if there will be a political change in leadership in the United States.

Trump’s approval ratings are heading lower and this leaves an opportunity for others to make a better run for the presidency. Will Joe Biden win? It will be difficult. He isn’t a great orator and I believe that many people have trouble relating with him. Trump on the other hand has a devout base of supporters and if it wasn’t for COVID-19 and the social unrest, I feel, and have thought since he took office, that he is a likely candidate to be a two term president. I don’t feel that way because he is a better president or because I like him but because I watch his ability to control the narrative around him. If you are anti-Trump look at Fox News for a Trump friendly perspective. If you are pro-Trump check out CNN for counter perspective to Trump. I compare both media outlets regularly.

Trump is in the news every single day and social media all day long. Everywhere I look he is there. He doesn’t have to pay to be seen. Everyone is trying to either boost him up or break him down. Regardless of what they’re trying to do, they’re giving him exposure. 

Biden does not have the same exposure and is likely positioned as the least worse option, not the better option. The case for him to win will be based more on Trump’s failures than Biden’s wins.

If I had to make a bet I would bet that the election will be close. I think it will be hard to tell who is going to win in advance. There will surely be some last minute political games played and scandals released. Remember that no matter what the polls look like heading into the election, polls based on people who actually pick up their home phone line (do these exist anymore?) and are willing to answer a question for a complete stranger. These people are not a good sample of the broader voting population. Therefore they will likely be a poor predictor of a real electoral outcome.

Should Trump be re-elected I think he will keep taxes lower and is more business friendly. On the other hand he will create more chaos with international trade and personnel changes in his administration. I think he would ultimately be a positive for markets. Remember that markets are mathematical machines that ultimately judge based on the likelihood of earnings outcomes.

Should Biden become the president he will likely raise taxes and will be less business friendly. On the other hand he will likely go back to the Obama methods of international relations and improve trade relationships. I think he would be a positive for the markets but less so than Trump.

Either way the stock market will likely be a good way to grow one’s retirement nest egg over the long term.

Stay healthy, promote tolerance and work hard.

Until next time,

Trevor Dale, CFA

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