Mr. Trump Goes To Washington

The following originally appeared on the Direxion Investments Xchange.

Throughout the election process, the major media came to the conclusion that Hillary Clinton was more likely to become the next president. And though the range of potential Electoral College outcomes was wide, the results were definitive. As Republican Donald J. Trump, a man who’s never held public office, prepares to become the 45th President of the United States, with the House and Senate under GOP control, markets prepare for an unbridled Republican agenda.

Still, there’s much uncertainty that remains about Trump’s policy agenda. Priorities have not been detailed. And while single-party rule may seem like an opportunity for carte blanche, not all Republican leaders in Congress will be completely aligned with all aspects of The Donald’s platform. And remember, Republicans will not have the 60 votes needed to pass most legislation in the Senate, as a result at least some bipartisan support will be needed to advance any bill; so nothing is a “slam dunk.”

Tax Reform and Regulatory Easing

Tax reform is centerpiece of Trump’s economic agenda. His tax plan has some synergies with ideas released by House Republicans earlier this year, so many expect this to be one of the early areas of opportunity for him.

We can also expect to see a shift in the regulatory environment. The President-elect has also proposed a moratorium on new regulation, and may seek to reverse some of Obama’s biggest regulatory initiatives. Congressional Republicans are also likely to place a heavier emphasis on cost-benefit analysis around the economic impact of any proposed regulations.

Since Dodd-Frank regulation was passed in 2010, new capital requirements have had an impact on banks’ investment returns, return on equity, and return on assets—which in turn has negatively affected those companies’ valuations. In fact, Republicans contend that Dodd-Frank’s Consumer Financial Protection Bureau has dictatorial powers that are overreaching. Its regulatory pressure of local and regional banks, the source of most home mortgages and small business loans, makes it harder for Americans to buy a home.

Financial stocks are enjoying a post-election rally as the Trump team has announced the dismantling of Dodd-Frank regulations on banks. Some presume that both regional banks, and financial powerhouses will benefit. However, no concrete policy has been outlined, so some say the rally is still based purely on speculation and may be overblown.

Think about this: Big banks have spent billions and transformed how they do business under Dodd-Frank over the past six years. What does it mean when Trump says he wants to dismantle it? The industry has no idea, but getting rid of the legislation may cause unintended consequences.

Financials-for-exchange Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com. One cannot invest directly in an index.

Affordable Care Act and Drug Pricing

President-elect Trump has promised to repeal the Affordable Care Act in his first days in office. Among other things, an outline announced this summer sites a transformation of Medicaid, including the elimination of federal rules that establish who should be covered such as poor children and pregnant women, and which benefits should be offered, leaving those decisions to the states.

But enacting the complex legislation needed to replace the ACA, while protecting those who now depend on it may prove to be a conundrum. A rollback may cause enormous political backlash. Many healthcare stocks fell amid worries of a potential repeal of the law.

Over the past few months, recent overtures by Hillary Clinton toward price controls in pharmaceuticals and biotech, have been headwinds for that sector. In the days after the election, healthcare and biotech stocks shot through the roof as drug-pricing pressures were relieved. Markets think that a Trump presidency puts to rest the potential for severe pricing regulations on drugs, initially sparked by Retrophin CEO Martin Shkreli, when he announced he was raising the price of a drug from $13.50 to $750/pill. The likelihood of new legislation controlling the pricing of drugs and healthcare services is severely decreased. US-based investment bank Jefferies said on Wednesday morning (11/9/16): “Sentiment towards the Healthcare sector ought to swing initially away from draconian fears over drug pricing.”

As political pressure is removed, healthcare is a growth industry driven by demand from an aging world population. As we’ve noted before, it’s also an important export industry, giving emerging markets access to modern-day medicine and modern medical technology. Health care demand is fairly insensitive to economic cycles and other macro factors, like the price of oil and the outlook for short-term interest-rate moves. This secular demand coupled with innovation provide a great environment to find companies that can compound earnings over time. So this may be a sector with room to run.

LABU and LABD both moved over 30% ― in either direction ― on Wednesday, Nov. 9th , as fears of draconian pricing regulation abated. Biotech-for-exchange Source: Bloomberg.The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com. One cannot invest directly in an index.

Trade Talk

Most everyone sees a friendlier environment for business, with the new GOP leadership. That would be a tailwind for certain sectors and could play into a positive fundamental outlook for earnings across U.S. stocks. But Trump has talked very tough on trade. He’s said he will seek to reopen existing trade agreements to improve terms for American workers. This, along with threats to impose tariffs on China and Mexico, have investors fearing a trade war.

Trump’s proposals may have significant implications on the materials and industrials sectors, as well as on consumer companies that do a lot of business abroad. Remember, S&P 500 companies generate about half of their revenue from outside the U.S.

Also, just as critical is other countries’ reactions to changes in our trade policy or treaties and how they may impact the flow of free trade and the prospects for companies that do a lot of business with foreign partners, foreign customers, and foreign markets.

Even though the S&P 500 has posted a gain as markets digest a Trump win, the Nasdaq has struggled. Many large cap tech names, including Apple, Facebook, and Google have been down to flat. This happened even though these stocks could theoretically benefit from a foreign profit repatriation plan, which Trump has said he’d support.

snp-for-exchange Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com. One cannot invest directly in an index.

“Yuge” Energy Boost

In terms of energy-related stocks, the Republican Platform states that “We remain committed to aggressively expanding opportunities and opening new markets for American energy through multilateral and bilateral agreements, whether current, pending, or negotiated in the future.” Any policies that support energy production may be a boon to oil & gas concerns.

Energy stocks have climbed steadily since Election day as investors anticipate “yuge” shifts in policy and regulation that have been promised by President-elect Trump. He’s promised to resurrect America’s long suffering coal industry and help oil and gas companies by cutting regulation and encouraging more drilling. Investors and traders are anticipating the roll back of the Clean Power Plan, an Obama initiative that aims to reduce carbon pollution and slow climate change. Trump has also pledged to finish the Keystone XL pipeline, which may benefit oil & gas exploration firms.

Energy-for-exchange Source: Bloomberg. Past performance is not indicative of future results. One cannot invest directly in an index.

As the weeks and months unfold, and the President-elect and the GOP has to commit to articulating and passing real policy, traders will have to find ways to find opportunity in the uncertainty. Now more than ever, direction matters.

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The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

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Mr. Trump Goes To Washington

Tax Reform and Regulatory Easing

Affordable Care Act and Drug Pricing

Trade Talk

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