How are we feeling about the stock market, my fellow contrarian?
More importantly, should we have an opinion on the market-at-large at all? I don’t think so. Trump 2.0 will create a “market barbell” of big winners and sad losers. Let’s focus on the dividend payers that will be propelled higher—and step over the laggards.
There are some dandy dividends ready to dart higher. Today they sit in the bargain bin thanks to investor reservations about the Federal Reserve. When Chairman Jay Powell took the stage in December, he delivered a sober discourse to investors: Don’t expect as many rate cuts as you were hoping for.
The lecture was not well received and seriously scared the herd. Fear is prevalent, per CNN’s Fear and Greed Index (FGI):
Here at Contrarian Outlook, we tend to fade the FGI. When emotions are running scared, we buy the bargains from weak hands.
They always have a reason for selling low. Granted, the narrative usually crumbles in the rearview mirror with time. But the vanilla financial websites must publish some reason that stocks are down today.
These days, it’s the hawkish Fed. But is this really bad news? The 10-year Treasury yield has been (paradoxically) rising with each Fed rate cut. That’s not supposed to happen.
This is the bond market screaming at Jay that there is no need for these cuts. The economy is fine. It absorbed the rate hikes, and we have seen neither a hard nor safe landing. In fact, we have seen no economic landing at all!
Last Friday’s strong jobs report showed this. The unemployment rate fell once again to 4.1%.
Remember the August pullback, when pundits and Fed officials alike were sure that we were heading into a recession? It triggered the “Taylor Rule”—a formula that is supposed to predict a recession. Last summer the Fed members seemed to hold the Taylor Rule as Gospel.
The Taylor Rule is newer than the Gospel, however. It has been around since… 1992. That surprised me too, as it’s spoken of as if handed down in biblical times. I’m in favor of most trend comebacks from the 90s, but the Taylor rule should have stayed behind.
So, the economy is humming, and the Fed finally admits it. Short-term rates will stay “higher for longer.” If this helps “contain” the 10-year yield below 5%, then I’m all for it. Higher short-term rates should keep the economy from overheating. (The path of constant rate cuts combined with “no landing” was not going to do it.)
Which brings us to President-Elect Trump, who takes office in five days. The most Dow-friendly president in recent history takes office with a healthy dose of fear in the markets. It is tempting to buy the S&P 500 or Dow Jones Industrial Average and be done with it—but we can do better.
I’ve been running the numbers on how certain stocks performed during Trump 1.0 for clues on how investing history may “rhyme” for the next four years. There are a few surprises not appreciated by the mainstream narrative.
First, conventional wisdom says to dump healthcare stocks. Robert F. Kennedy Jr. will be running the Department of Health and Human Services. Sell ‘em all, right?
Wrong! The top five holdings of this discounted 14%-paying dividend fund returned 126%, 141%, 179%, 227% and over 1,000% during Trump’s first administration, benefiting from lower regulation and a strong economy:
Trump 1.0: Healthcare Stocks Largely Rallied
Yet the BlackRock Health Sciences Trust II (NYSE:BMEZ) fund sits at an 11% discount to its net asset value (NAV) on fears that RFK Jr. will obliterate the entire sector.
Let’s take a deep breath. RFK does not determine what the Federal Drug Administration (FDA) does, which traditionally operates on its own independent of politics. Plus we have sector blue chips like UnitedHealth Group (NYSE:UNH) and Abbott Laboratories (NYSE:ABT) who are likely to roll along merrily as they did in Trump’s first term. UNH and ABT sailed 135% and 199%. Their businesses were good then, and they remain good now!
Trump 1.0: Bullish for Blue Chip Healthcare
What about energy? Crude oil rallied last Friday on the latest round of US sanctions against Russia. Is reduced supply coupled with a strong economy bullish for energy, or does Trump’s “drill baby, drill” mantra ultimately put a lid on prices? I’ve heard from careful readers concerned that Trump “drilled so much in the first term, he tanked oil.”
It’s true that energy prices trended down all four Trump years, but the bear market in oil started in 2014—two years before 1.0—triggered by the US shale oil supply boom that began years prior. So, by the time Trump was inaugurated in 2017, these trends were already in motion. So I would not draw many conclusions from these two ugly charts, which feature two of our favorite dividend growers in the energy patch, EOG Resources (NYSE:EOG) and EQT Corp (NYSE:EQT:
Trump 1.0: Bear Market for Energy was Underway
We must deal with government contractors on a case-by-case basis. The new Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, is looking to eliminate $500 billion in spending. This is a potential headwind for federal-powered gravy trains.
It’s possible we see a “peace dividend” as well. Trump may cut a deal with Russia to end the war in Ukraine or with China to ease tensions in the Pacific. Given these headwinds contractors are now generally in “stay away” territory.
One exception I am making is for General Dynamics (NYSE:GD), which is a backdoor play on AI automation at the federal government level. GD flatlined during Trump 1.0 but we have higher expectations this time around given the AI angle:
Trump 1.0: GD Flatlined
AI plays a central role in General Dynamic’s IT strategy. It has deployed a Luna AI system that uses machine learning to draw insights from large streams of data. Luna is designed specifically for government and defense applications. The “Luna lift” is evident in GD’s new orders and total sales backlog.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."