Whether you are pleased with the Election outcome, or not, the market has provided interesting clues on how it sees the roadmap into Trump 2.0.  We view the equity market’s initial post-election advance due, on the one hand, to non-partisan relief – at the presidential level and in the majority of Senate and Congressional races we saw uncontested results; and, on the other hand, an early read on Trump 2.0 economic policies as pro-growth and anti-inflationary.  On the economic merits we could have sympathy for the former (pro-growth) but view the perpetuity of the latter (anti-inflationary) as a stretch, particularly over the intermediate term, i.e., 12+ months.  Keep an eye on the 10-year U.S. Treasury bond, which has continued to back-up since the Fed’s -50bp policy rate cut in Sept., and hovers around 4.50% as of this writing – 4.50% on 10s has proved a red line for risk this cycle.

The next several weeks will likely be consumed – as the last month has been – by the President-Elect’s personnel choices.  There will be positive and negative surprises.  We have watched the post-election rally fade against a backdrop of infighting among Transition team heavyweights over key economic team assignments.  Ultimately policy is people.  While some answers are known, i.e., our friend Scott Bessent will lead the Treasury Dept. and Cantor Fitzgerald CEO, Howard Lutnick, will head the Commerce Dept. and command sweeping oversight of trade policy, the market’s attention will turn to the finer points on the incoming Administration’s intentions on taxes and tariffs.  While much attention will be paid to Elon Musk and Vivek Ramaswamy’s Dept. of Government Efficiency (“DOGE”), corporate operators will wait-and-see on taxes and tariffs before committing to strategic initiatives and capital allocation proposals.

In the meantime, we encourage investors’ focus to remain on the economic and fundamental backdrop.  If risk assets are ultimately a function of earnings and interest rates, then the backdrop remains positive.  Corporate profits came through the 3Q earnings season in fine shape, posting a +8.6% Y/Y gain (+11% ex-Energy!).  Full-year consensus for S&P aggregate EPS are running ~$242; a strong 4Q result should see earnings end the year on an up note.  There appear to be few catalysts signaling imminent downward revision to 2025 estimates before the debt ceiling is cleared and tariff policy clarified.  The consensus outlook for next year ($270-275) is predicated on strong top-line follow-through and significant operating leverage.  That’s a tightrope with forward multiples at ~22x and lurking inflationary pressures, but spreads remain tight, and yields continue to trade with economic activity measures.  In the near-term, continued strength from the U.S. consumer (UMich notched a 7-month high in Nov. in front of holiday sales season) and a surge in liquidity in 1Q’25 bodes well for the market.

Source: Strategas, Data as of 11/25/2024

The backdrop looks bullish into the New Year and likely has some legs through 1Q’25.  As we note above, investors should keep an eye on the 10-year yield as an instructive risk barometer to which we would add credit spreads (which are well contained), bubbling inflationary pressures in Japan (which could invite a policy response from the BoJ) and generally weak economic data from Europe (which could worsen against hawkish trade policies).  Domestically, Tech has struggled as leadership continues to evolve – and broaden.  As we noted last month, excluding Utilities – which continue to carry the thematic torch for the “Industrial Power Renaissance” theme – sector leadership remains decidedly cyclical.  Among the most frequently asked questions from clients is, ‘what to make of the recent strength in Bitcoin and Small-Caps?’  While enticing, we view their collective run as signposts for the “anti-inflation” and Trump 2.0 “pro-growth” narrative as opposed to a decided pivot on established fundamental grounds.  The liquidity argument presented by Bitcoin and the noted Value orientation of important pockets of the small-cap universe would seem at odds.  Inasmuch we have not increased exposure to Small-Caps in our tactical allocation portfolios (though we gained a modest increase to net exposure through our active thematic allocation sleeves and within Strategas’ ETF suite).  On Bitcoin, while the recent price surge has likely fostered no shortage of jealousy for the “HODL” crowd, we were reminded this week of legendary investor Marty Zweig’s observation of “intellectual bullishness” vs. “financial bullishness.”  We think most investors are intellectually bullish Bitcoin rather than involved financially. 

Index returns are for illustrative purposes only, and do not represent actual performance of a Fund. Index returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

We remain bullish on Gold.  An oversold asset in durable upward trend with geo-political and economic tailwinds at its back.  It is worth noting, that inflation data remain stubbornly elevated (and above where policymakers would like it).  U.S. CPI for Oct. came in at 2.6% Y/Y with Ex Food and Energy higher, at 3.3% Y/Y.  Our Strategas “Common Man” CPI – a subset of the non-discretionary items in the headline basket – came in at 2.8% Y/Y last month and has run ahead of the headline gauge in 40 of the last 45 months.  All in, this gives the Fed, as Don Rissmiller has suggested, cover to skip a cut at the Dec. meeting while remaining in an easing posture.  The Strategas Macro Thematic Opportunities ETF (SAMT) is invested in the three to five themes in which our team sees the greatest “thematic momentum” against the broader macro-economic landscape.  Though early, tracks appear to have been laid for “Everyday Inflation” to start gathering steam in the New Year.  Stay tuned.

Where is there “thematic momentum” currently?  We see four…

In a nominal world idling, in our view, between two elevated inflationary regimes, with credit priced to perfection and the long rates backing up, we remain thematically bullish on “Cash Flow Aristocrats.” These are companies that can self-fund and preserve optionality in a period of increased economic volatility. At a high level there are only seven outlets for the c-suite to allocate free cash.  Three outlets to return cash to investors: 1) buybacks, 2) dividends, 3) retire debt; three outlets to invest in the franchise: 4) acquisitions, 5) capex, 6) pay labor more or pay more labor (the multiplier is different); and 7) take cash flow into retained earnings and reassess in the future.  We would view aggregate P/FCF multiples closer to mid-range and not pressed toward the upper bound of their historical range as other valuation metrics are as decidedly bullish. 

All eyes have been on “Artificial Intelligence” since OpenAI unveiled ChatGPT in Nov’22.  The first phase could broadly be summarized by the price performance (and capex) of the Mag 7 and friends bulking-up on compute capacity.  As other hyperscalers raced to bring products to market, investors become enamored with the imperfect output of the latest model releases, their inclusion in every SaaS offering, and the potential for what was to come.  Interestingly, what the industry is grappling with now is a lesson learned from the late-’90s dotcom boom.  At the time, anything with “.com” at the end could catch a 2x, 5x, 10x… bid but the shine quickly faded into bust.  What remains is the infrastructure on which the Internet runs nearly 25 years later.  The limitation industry now bumps up against is harvesting enough power to allow the increasingly large chip clusters to do their work.  That has given rise to a separate theme, the “Industrial Power Renaissance,” emerging in its own right and evolved the opportunity within “A.I.” for investors to be increasingly selective along both hyperscalers, i.e., computation power leaders, and the frontier labs and those making the critical developments toward artificial general intelligence, “AGI.”  Moreover, as Jason Trennert wrote last month, it could be suggested that the CEOs of public companies expected to use A.I. to improve their operating processes are more at risk of getting fired by spending too little on the technology than too much.

The enormous electricity needs to develop A.I. technologies will make efforts to move away from fossil fuel use far more difficult than perhaps hoped.  Nuclear projects, while costly and time-consuming, are going to continue to be seen as an important energy solution.  Myriad other “alternatives” will be developed to satisfy America’s (and the developed world’s) insatiable appetite for power (lower case “p”).  The “Industrial Power Renaissance” may be the theme with the greatest thematic momentum heading into 2025.

Broadening the macro lens “De-Globalization” maintains, by our lights, considerable thematic momentum.  A broad theme with many interesting and cross-cutting currents – ranging from: Trade Relations & Supply Chains, Natural Resource Procurement & Energy Security; and, Defense Alliances; to, Technology Alignment & IP Sharing; and, Populism – De-Globalization illustrates the utility of both incorporating macro thematic drivers and arbitraging time horizons in portfolio construction. As long-held geo-political operating conventions continue to erode, the ubiquity de-globalization thematic threads will continue to impact portfolio construction for years to come.  This is a frequent topic of discussion with both institutional managers and wealth advisors. 

Change in the composition of government, particularly involving the perceived policy gap between the outgoing Biden Administration and incoming Trump Administration, is sure to cause market dislocation.  Coupled this with heightened geo-political tensions and pockets of economic volatility and the case for a macro lens on asset allocation and portfolio construction would seem intact.  Monitoring this landscape for emerging themes and employing tactical “thematic rotation” to those areas with notable “thematic momentum” is the design of Strategas’ suite of actively managed thematic ETFs.  For more information visit our website at strategasetfs.com.

Nicholas Bohnsack