August 18, 2017

From time-to-time, 3D will publish politically-themed articles whenever such themes hold investment implications such as was the case with the growing populist movements of 2015-2016 that culminated in the election of Donald Trump as president.  We do not advocate positioning your investments around political outcomes; nonetheless, investment decision-making cannot be totally divorced from the political environment as the latter helps establish the backdrop for how capital holders are ultimately compensated for taking on the risks of funding profit-seeking initiatives. 

We believe Charlottesville (and this administration’s subsequent responses) threatens to undermine fiscal initiatives concerning tax reform and infrastructure spending. The tragedy that unfolded in Charlottesville has the potential to significantly impact one’s macro outlook concerning the U.S. investment landscape with respect to what happens at the national political level. 

Charlottesville has stirred up emotions that will likely reverberate through the next electoral cycle and, perhaps, beyond.  What it has produced, in the short-term, is higher political uncertainty which is feeding into market volatility (the latest fallout could be the departure of National Economic Council Director Gary Cohn).  Several pundits believe that much of the Trump agenda (tax reform, infrastructure spending) is “under threat” as a result of the administration’s response to Charlottesville.  If so, then removing these key fiscal initiatives will effectively hamstrung the cyclical Trump trade, but will also have broader implications for risk asset pricing. 

There are some who hold out hope for progress on tax reform, but Charlottesville has put race relations and America’s past front-and-center, deepening the chasm across the political divide.  America needs to have a dialogue, but, by definition, there can only be one top priority, and if everyone’s attention is on Charlottesville, it means lesser attention is being paid to other important matters, whether running a company or trying to pass a government budget.

The Investment Impact

Charlottesville exposed quite a few fissures that have made their way to Washington D.C. and those fissures will likely impair D.C.’s ability to arrive at a consensus on tax reform and infrastructure spending.  The markets are keenly aware of this as reflected in the underperformance of the cyclical trade (small cap, value, cyclicals), the pricing of municipal bonds versus Treasuries (see 3D July 2017 Market Commentary), the weakness of the U.S. dollar, and the likelihood that the Fed will raise rates again in December (not likely).  

RIP for the Trump Trade?

Exhibits 1a and 1b: Small Cap and Value Underperforming (YTD through 8/11/2017)

Exhibits 2: Industrial Cyclical Sectors Underperforming Growth and Defensive Sectors

Exhibit 3: Dollar Weakness Over the Past Year (Ending 8/11/2017)

Is Charlottesville the final nail in the coffin for the so-called 2017 Trump trade?  One could argue that those nails were hammered in with each tweet that comes out of the White House.  However, what matters more over the long-run is the downward inflationary pressures stemming from the New Normal environment causing investors to seek out scarce rates of return in the form of high yield and high certainty in known growth companies.  Could we see a new Nifty-Fifty environment rise from the ashes of the Trump trade?  Are the FAANGS becoming the “one-decision” stocks for future generations?  Good news for FAANG investors is they have the opportunity to own both the equity and the debt, as the latter has turned out to be quite popular based on oversubscriptions. 

But, we are long-term investors and are committed to strategic asset allocations built on historical risk/reward relationships (although the marginal benefits of buying high prospective growth companies and heavily-indebted companies seem to diminish with each new advance in the market indices).  Inflation expectations remain elevated despite continued declines in core inflation readings.  Recent economic and retail releases suggest that a recession is not around the corner, although a slowdown in China certainly casts an ominous shadow over the global horizon.  Growing debt burdens only become a problem when the ability to service those debts becomes a problem (in the form of a slowing or contracting economy). 

Charlottesville is a flashpoint and how events will manifest themselves over the next cycle remain to be seen, but the implications don’t bode well for anything meaningful to come out of Washington.  But is it enough to push the economy over the cliff?  Markets will continue to advance with strong corporate earnings (even if the multiples come down from recent highs), and those earnings can continue to grow even on anemic revenue growth as long as current profit margins remain intact.  For now, investors should not expect Washington D.C. to help extend the cycle and should assess whether taking on marginal risk in growth and leverage is worth it based on current market pricing. 


The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. Neither the author nor the firm openly endorse any of the political candidates, parties, movements, etc. referenced in this article. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions of others are assumed to be true and accurate; however, 3D Asset Management does not warrant the accuracy of any of these. There is also no assurance that any of the above is all inclusive or complete. Past performance is no guarantee of future results. None of the services offered by 3D Asset Management are insured by the FDIC, and the reader is reminded that all investments contain risk. The opinions offered above are as of August 17, 2017, and are subject to change as influencing factors change. More detail regarding 3D Asset Management, its products, services, personnel, fees and investment methodologies are available in the firm’s Form ADV Part 2, which is available upon request by calling (860) 291-1998, option 2, or emailing or visiting 3D’s website at