Thoughts on Trump Proofing Your Portfolio

To paraphrase Forrest Gump, the Donald Trump presidency is like a box of chocolates, you never know what you are going to get! But with the stock market recording ever-new highs, it’s time to get going.  Protecting yourself means, you have to accept there will be surprises and surprises sometimes can be humbling.

Having made that disclaimer, lets start with a few obvious things.  Investor confidence is brimming that the Presidents pro business policies will be successful.  Of course, why else would the market be at these levels?  But, there is absolutely no guarantee this will happen either in whole or in part.

We began by realizing investors are abnormally calm.  Look at the markets volatility index or VIX and you will find a near 45% drop in the index since just before last November’s election. In fact, the index is near a 10 year low.  This doesn’t make sense.

If there was serious doubt about President Trumps policies or if his image of crazed despot portrayed in the media, the VIX would be fluttering well above 20 rather than closer to 10-12 where it has been hovering lately. During the 2008 financial crisis, the VIX hit 60.

This lack of volatility has direct implications for one of the ways professionals often choose to protect their portfolios: with options.  In this case we are talking about owning Put Options on the S&P 500 or the Nasdaq.

Options are not for everyone, but they are an efficient mechanism.  In one single transaction you protect your entire portfolio.

Right now is a good time because when volatility is low, often option premiums are at a low.  In addition, option prices are fundamentally tied to interest rates.  If interest rates increase this year the price of Puts will rise also.  So now may be a good time to get started.

For those uncomfortable or simply prefer a sector strategy consider several options.

The President has made it clear, he wants to boost military spending $54 billion by cutting regulations and other items.  So the defense industry is a natural beneficiary with traditional names like Boeing and Lockheed.  There are many more names to consider.  The caveat here of course relates to Trump getting his military budget through Congress. That‘s a pretty big if.

Before considering purchase or sale of securities related to any of these companies, check with your advisor.  He/she is whom you are paying for advice.

Another area could be robotics companies.  Finding a pure play in a public vehicle is challenging but #5 Bosh and #6 Google top the public list.

The President has had multiple meetings at the White House with the CEO’s of Americas manufacturing biggies.  There seems to be lots of smiling faces around the table at that means good things for bring work back to this country.  But work does not automatically spell jobs. The hourly rate differential in many cases is still to great for this to happen.  In addition there is the question of job training and retraining.  That means demand for robots while the demand for labor most likely will be for building, programming and maintaining the machines.

Finally, we are willing to bet that healthcare turns out to be way too big a problem to solve even for The Donald.  As he recently was quoted, “Nobody new that healthcare could be so complicated”.  He is now learning that this is one campaign promise he won’t be able to keep.  The natural tendency would be to lean toward the healthcare insurers like United Healthcare, WellPoint and Aetna.  But there is uncertainty over what form the new version of the Affordable Care Act will look like.  The safer bet might just be those damn prescription drug companies where demand growth and pricing power combine to produce above average growth.

These are only two strategies and clearly not the only options. Of the two, we favor the overall approach offered by options in partial because it takes a global approach to uncertainty.  President Trump starts his term in office with the lowest approval rating ever recorded.  If the suspicions of almost two-thirds of American voters prove accurate, the price of lots of stocks will suffer.

Up to now those who support Trump accept his brash off the wall style in return for the promise of strong leadership and fundamental improvement in government. His approval ratings may be low but distrust in government is America’s most important domestic issue.  As time goes if the President is unable to deliver, the crowd noise could get very loud and that would not be good for the market.

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