The Election is Over -- What's Next? Jarvis Update November 8, 2024

The 2024 election is behind us. What should be the next step for investors? We answer that question and much more on this week's Jarvis Update. I'm your host, Brian Dress, director of research and an investment advisor here at Left Brain, joined as always by our CEO and our chief investment officer, Nolan Langford. Nolan, welcome to the program.

Don't forget, early voter.

You should have brought your sticker to, to the program today.

I should have.

So we did want to give you some words of wisdom, of advice on how to approach investing as we do see a shift in the balance of power in Washington. We've got two topics for you as usual in our preview. The first is our outlook on what changes to expect, and then the second topic is new areas of opportunity over the next 2 to 4 years. Before that, a quick market recap. Over the last week, we wanted to look at the last 5 days of trading and the returns for, for the big averages in the market. The S&P 500, that's the broader market, was up about 3.9% this week. The NASDAQ, the tech-heavy NASDAQ, was up about 5.4%. And then the small-cap index, the Russell 2000, was up 7.3%. So obviously really good weeks for all 3 of those. And then I also wanted to mention interest rates. This has been something we've been watching over the last few weeks. The 10-year Treasury rate has been ticking up pretty steadily over the last 6 weeks. It touched 4.5% this Wednesday, and now it's finally started to come down. It's down to about 4.3% at the time of taping. So we have had a positive move in terms of bringing rates down. Nolan, what's your reaction to the post-election market reaction?

You know, I was somewhat surprised. Two things surprised me. One, the election results that you know, Trump won wire to wire coming out the gate. We had heard that the, uh, the race was going to be quite a bit more tight. And I think myself and most of the market participants had kind of strapped in, ready for a 4 or 5-day duke it out to find out who won. So I think part of that positive reaction that we got in the market could have just been a huge sigh of relief. But it was powerful. I was surprised. And it lasted for 2 days. So also pleased.

Yes, we're happy to see the markets moving higher into record territory. What the market hates more than anything is uncertainty. As you mentioned, we do have certainty for better or worse. And so that's putting— we're putting that all behind us moving forward. We have an idea of what things are going to look like in the future. And so the markets do like that certainty. I also want to note that we did have the most recent Fed meeting that was today, Thursday. As we're taping, and the Federal Reserve did decide to have another quarter-point interest rate cut. We also wanted to show you— we're going to remind you the exact same chart we showed 2 weeks ago in our last video, market returns by party since the 1950s. So Democratic presidents, we've had markets that have risen about 13% annually, and under Republican presidents, around 10% annually. What we just want to mention is that either way things go, generally markets move higher. As I always like to say, don't mix your politics with investing. Don't do anything rash based on this election result. Nolan, any thoughts in that category?

A lot of nuggets of wisdom in those last couple statements. I'll leave it there.

Fair enough. Let's move to topic 1. So topic 1 is outlook of the new administration policy. So Nolan, there are obviously going to be huge fiscal policy differences between Democrats and Republicans. Most specifically tax policy. And the most recent tax law came from 2017. We know that at the end of 2025, that tax law will expire. So next year in 2025, huge priority for Congress and the administration is going to be getting a new tax policy in place. What are your expectations of policy changes coming out of the new administration, specifically tax policy and anything else? Outside of the fiscal realm?

You know, I think that this is good that Donald Trump and the Republicans won, at least if you're a person who likes lower taxes. This definitely a win because you're right, the tax cuts that were put in in 2017 are scheduled to sunset into 2025. So the fact that we have Republicans in charge is really good. At least there's some hope that we'll still keep these low, somewhat lower rates, although they don't feel so low. So I'm optimistic there. I think the biggest— the bigger takeaway for me with the change in administration is just what it does to the overall sentiment. On Wall Street, we call them animal spirits. And where I'm from, we just call it feeling good. But you certainly feel good in this regulatory environment that you have somebody in the White House who, at least at this point, we think understands business. We think that is here to help and that has some ideas that will do what historically has really unlocked really good growth in our country. And that is a lot less regulation or lighter regulation and a lot less taxes, just not such a hostile business environment. I think that's what really frustrated a lot of people, not just, you know, Lena Khan at the FTCC, but You know, the CPB, the Consumer Protection Bureau. But so I think that's what you're seeing. It's just a big sigh of relief that we've turned the page. And I think people are really excited about it.

I did want to ask just specifically about one thing, Nolan, and that's mergers and acquisitions. You did mention Lina Khan at the Federal Trade Commission, who has been sort of negative on a lot of the merger opportunities that have come to her desk. Just talk briefly about what that might mean, that change might mean for, for investors going forward.

So I think investors, you know, if you're a stock owner, I know everybody's listening to this broadcast as a stock owner, but I think it's good for you. Mergers and acquisitions have created significant wealth in the past. And for all those who are not market pros, that's just when Company A buys Company B. And typically because Company A is the acquirer, they have to pay a premium to buy Company B. So all the people who owned Company B, they're going to get a really nice bounce in the share price when Company A comes calling. And so that's been really beneficial for stockholders. It's really beneficial for the investment banks because they put the deals together so they get the merger fees and right on down the line of chain of people who get fed. I think what worries the government and what worries some people who aren't pro M&A is what happens to the workers. Because typically the reason the stock goes up is stock owners are forecasting higher profits because expenses are going to be less. What's going to drive lower expenses? Synergies, i.e., we get to fire a bunch of people and cut costs. So I think it's a double-edged sword. This administration has been, you know, fierce advocates of competition, meaning no companies merging or buying one another. And so now it's viewed that this administration is going to be a lot more friendly and a lot less hostile. That's the view. That's what drove those banks to record highs yesterday.

And, and so specifically, Nolan, and I'll just mention this quickly, is that we've seen the Russell 2000 stocks, the small cap, the mid-cap stocks lagging the bigger stocks over the last few years. And so we can't necessarily expect that those stocks will catch up, but it is very possible that they may with this new regulatory regime and specifically with mergers and acquisitions, putting some of those companies back on the trade block where they may be purchased for those premiums. So we'll keep an eye on that over the coming couple of years. With that, we'll move into topic 2. So topic 2, Nolan, investment opportunities coming out of the election. We do see shifting fortunes in a number of industries when power changes hands in Washington. I want to just cut right to the meat of it here, Nolan. Considering current circumstances, what are some of the areas of the market that you're seeing opportunity?

There are so many areas for opportunity. I just pause a little bit. You know, there are definite winners and losers, at least over the short term. The market told us that solar is definitely a loser, or at least so far it has been a really big loser. Banks are winners. I think healthcare, the jury is still out. I think net-net, it's probably more of a neutral. I think technology, you know, it's interesting. The NASDAQ rallied yesterday, but not as much as the Dow Jones Industrials. So I think those old-line industrial, whether it's energy or transport companies, I think people are looking at these old economy stocks to get sort of a rebirth. But back to the traditional growth sectors like technology, I think that they will still do well, even though there's no sort of rules or regulations coming out of this administration that's going to give them a catalyst. I just think the overall economic environment being a lot more healthy and businesses getting back to normal, and a lot of this macroeconomic noise goes from the front page to the back page. I just think that general settling down of things will be good for traditional growers.

And then let's talk about interest rates too. So coming into the election, we did see the interest rates starting to creep higher again after coming down over the few months previous to that. We do expect some sort of fiscal policy that's expansionary, whether it be tax cuts or spending or some combination of the two. With that being said, Nolan, what do you expect for interest rates kind of in the short and medium term?

Interest rates have really been all over the place. You know, I know we talked about this on the last broadcast. But, you know, to think that they've gone from, you know, 0% to 5%, back down to 3.99%, back up to 4.5%, and back down now to 4.20% in such a short span is just breathtaking. Mhm. Even the expectations— think about this, Brian. We're talking about the Fed, and it wasn't that many months or so ago that in this year, 2024, we had priced in 6 interest rate cuts this year. That's just this year, within the last 8, 9 months. And now we've gotten one, and we got another one today, so we got two. That might be it for this year. Maybe we get one more. So just way off on interest rates. It's just very, very hard to predict. So there's two things happening. One is the economy is hot, um, which you would expect to be inflationary. However, the Fed has told us they're going to continue cutting rates. So, you know, cutting rates into a strong economy Generally, it, you know, results in higher stock prices 12 months later. But we don't know what it does to inflation. So I don't know what happens with interest rates from here. I think this environment, you know, this 4 to 4.5% range on the 10-year Treasury, I think is still a healthy level where the economy can still grow and still expand. I think if that number gets back to 5% on the 10-year, I think that's trouble.

Okay. And then let's talk about something specific. And we've been discussing this all year— income securities, interest rates filter into what, how that play out. Looking at the outlook for obviously the election and the changes coming along with that and also interest rates, what do you think about income securities in the light of those changes?

Yeah, this is a really important topic. We have millions of Americans every year that retire. We have many, many millions, tens of millions that are already retired. And most of them count on their portfolio in some sort of way to supplement the Social Security or pension income that they get. So being able to generate income for most investors is really, really important, and we've struggled with that for a very long time because interest rates are at zero. Uh, so now if you take a look at the bond landscape, you can get decent yields now, at least those above inflation. Money markets are at 4%, you can get bonds at 6%. We think it's good, not great, And so I think the demand for income has never been higher, but the opportunity to grab it may have never been lower, at least at a juicy number. So what we've been focusing on is things that we can pay the bills with, securities that can pay us dependable income that we can live off of. And today we are going to talk about a security that we like, happens to be in our income model.

Yes, Nolan. So I did want to discuss something specific in terms of income securities, and I wanted to talk about one that may actually benefit from higher rates over time, and that's BKLN. Can you tell us about BKLN a little bit and the opportunity that it presents for investors?

Yeah, BKLN is an ETF that stands for exchange-traded funds, which means it's a basket of securities, in this case bonds or bank loans, but it trades intraday just like a stock. So every day the stock market's open, you can buy and sell it. So remember, if you're going to do this on your own, these things trade by prospectus. So make sure you do your work before you buy it. But it's a package of bank loans. Banks go out, they make loans. They're in the business of taking in deposits in the front door, lending money out the back door. And so they have to lend money. And these loans, they don't often keep on their balance sheet. They may keep some of it, but then they chop it up into securities and offer it to other investors. In this case, the sponsor of this ETF buys a basket of these puts them in here, it collects the interest income, pays it off to shareholders in the form of a monthly— that's right, not semiannual, not quarterly, but a monthly dividend.

Excellent, Nolan. And can you tell us a little bit more of the details on this one?

Yeah, so it's a basket of bank loans. Bank loans tend to reset. So what that means is every so often, depending on what's written into the loan documents, if interest rates are higher the borrower, then their loan adjusts, so they have to pay more money. So if rates go up, this one should have interest rate protection because we expect the income to go up. If interest rates fall, then the value of the loans on its books theoretically should rise, just like we always look at that chart— interest rates down, bond prices up. What we really like is the income. It pays it monthly. The yield right now is over 8%. And it pays it monthly with a nice long track record.

Excellent, Nolan. And these are loans that they hold, not necessarily available in the open market for trade. So it's a good way to get exposure to first lien debt, which is something that's not really traded out in the market, especially for retail investors. But that will leave it there. We're going to close out for the week. There are other places where you can hear about the changes in healthcare policy, foreign policy, and all those different things. We're going to stick to what happens for investors. We're going to ask you to like and share the video if you've made it this far. It does help other investors find it. And please hit the subscribe button. I'm going to put up a little chart up here, one of our most recent videos where 91% of you who viewed the video didn't subscribe. So, I'm going to cajole you to hopefully hit the subscribe button and make sure that you get this every time we're out every other week with these. Nolan, any final thoughts as we close out this week's video?

Been an exciting week. We're heading to the holidays. Time for us to be with family and friends and reminisce on how much our portfolios have percolated this year. So people hopefully are heading to Thanksgiving feeling really, really good. We have an elected president. The economy's strong. This is a great time. We're in sports season. It's great to be an American. So hopefully our viewers will have a great weekend.

It sure is. Nolan, thank you for being with us. Thank you to the viewers, and we'll see you again next time.