Energy & Resources Digest

Trump Trends for 2017

Money is shifting around in the market, moving into industrial metals and energy.

But that's not all. We see strong trends lining up for the next year...

Here are the "Trump Trends" we see surging toward us at lightning speed.

Trend No. 1: Fed Rate Hike(s). The Federal Open Market Committee finally did it. In December of 2016, the Fed raised interest rates for the second time in over a decade. And it pushed the lever higher with another increase in March of this year. We'll probably see a few more hikes in 2017.

Why? Well, there's the fact that the economy is already improving. Fourth quarter GDP growth hit 1.9% in 2016. In 2015, the Q4 growth rate was below 1%. And in Q3 of 2016, GDP grew at 3.2%. That's the best in eight quarters...

What's powering this? Rising consumer spending, business investment, home construction and agricultural exports.

Plus, President-elect Trump wants to spend a lot of money rebuilding infrastructure. As that works its way into the system, the economy will heat up even more. Hence the Fed will probably raise rates again in 2017.

Fed rate hikes are expected to be bad for bond prices and gold prices. As yields go up, prices of existing bonds go down. And the yellow metal doesn't pay a dividend. Higher rates make that more obvious.

We don't think an extra rate hike is the bugaboo many make it out to be. The current Fed base rate is 1%. One rate hikes of 0.25% will see the benchmark rise to 1.25%. That's not a lot.

Still, we could see pressure on gold in the short term as it is priced in. And that will be a buying opportunity considering other financial pressures roiling the global system. We're talking rampant money printing, potential central bank bankruptcies in the European Union, accelerating debt problems in China and more.

But for immediate winners, look to banks. They ring the cash register when rates go higher. We like regional banks. There's a lot of consolidation to be done there. And the SPDR S&P Regional Banking ETF (NYSE: KRE) is the biggest.

Trend No. 2: Stronger U.S. Dollar. With rates going higher, the dollar will go higher.

Many people think this means lower sales profits for S&P 500 corporations and lower stock prices. Wall Street will tell you that a 10% rise in the dollar subtracts 2% from S&P 500 earnings.

Time for a reality check!

The U.S. dollar is up 9.7% since its low in May. But in the fourth quarter, sales rose for S&P 500 companies, up 5.4% year over year.

FactSet says that S&P earnings are up 4.9%. This is the first time the index has seen year-over-year growth in earnings for two consecutive quarters since the first quarter of 2015.

What a stronger dollar does is increase the earnings of companies that sell into the U.S. market. Think global mining and material stocks.

One way to play it would be the iShares MSCI Global Metals & Mining Producers ETF (NYSE: PICK).

Trend No. 3: Massive Fiscal Stimulus (sort of). Trump has proposed spending $1 trillion over 10 years to rebuild infrastructure and stimulate the economy. However, he favors tax incentives rather than direct stimulus. It remains to be seen how effective that is. But this plan will likely boost spending on infrastructure. Maybe by a lot.

And it's not just America that is ramping up infrastructure spending. Here's something interesting. China infrastructure investment last year alone was $2 trillion! And it's increasing at a rate of about $300 billion a year.

So this may be a good time to look at the iShares Global Infrastructure ETF (Nasdaq: IGF).

Trend No. 4: Massive Tax Cuts. Trump wants to lower the corporate income tax rate to 15% from 35%. That will stimulate corporate profits.

How much? Analysts at Citi Research say reducing the effective corporate tax rate by 7% could raise S&P 500 earnings by 9%.

Naturally, a good way to play this is just to buy the S&P 500 ETF Trust (NYSE: SPY).

Trend No. 5: Less Regulation. Trump has made it clear that he wants less regulation. Specifically, he named the U.S. energy industry. So that will lower costs for energy companies.

Will that boost the profits of the members of the Energy Select Sector SPDR ETF (NYSE: XLE)? It's likely. And select stocks could do very well indeed.

Trend No. 6: Tax Repatriation. U.S. corporations have nearly $2.5 trillion in profits stashed in overseas markets. That's based on a new report from Capital Economics. Trump wants a special corporate tax holiday. Under this plan, corporations can pay a tax rate of just 10% on overseas cash in order to bring it back into the United States.

The last time we had a tax holiday, in 2005 under George W. Bush, $300 million came home. For every $1 that came back, shareholder payout increased between $0.60 and $0.92.

Most of the increased payouts came via share buybacks. According to a Harvard University study, of every $1 repatriated, buybacks increased by $0.79.

So it's likely that this time around we will see big corporations A) boost dividends and B) buy back their own stocks.

You can see these are predominantly large cap tech names. So the Technology Select Sector SPDR (NYSE: XLK) should do well.

One more thing: If the tax holiday plan passes, that flood of incoming cash should send stock prices - and the U.S. dollar - much higher.

Why the dollar? Because companies will have to convert foreign cash to dollars to bring their money back home.

Usually, the chances of a president getting all or even most of his economic program through Congress is quite low. However, Trump will have a Republican Congress and Senate. That raises his odds. These trends will depend on some wild cards. Will the global economy continue humming along? Will America enter a new recession? Will Trump start a trade war with Mexico? These and other unknowns could upset the applecart.

Still, for the sectors and industries riding the Trump Trends we've laid out, the future looks bright. Consider using pullbacks to load up on Trump Trend picks.

Good investing,

The Energy & Resources Digest Research Team
The Oxford Club

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