CNBC Pro Talks: Dan Clifton on which stocks could be turbocharged in Trump's next term 11/25/24

0:01This is CNBC Pro Talks, where we go one on one with Wall Street's top investors, smartest traders and rising stars. We find out what makes them tick, what makes them money, and how you can follow in their footsteps.

0:18Welcome to the latest edition of CNBC Pro Talks. I'm Dominic Chu. We're recording this episode just a little more than two weeks after the 2024 election, where Donald Trump reclaimed the White House, while Republicans managed to hold on to power in the House of Representatives and actually flip the Senate to their control as well, the so-called red sweep. Now, since Election Day, Wall Street has been trying to make sense of what that GOP sweep could mean for things like the economy, for business, and for maybe even the U.S. stock market. We did see, first, a sharp rally, and then a minor pullback from some of those post-election highs, at least in the stock market.

1:03We're here this month to look beyond the price moves in the immediate aftermath of the election day to talk about how investors should position themselves for the medium to longer term, even after the keys to Washington, D.C. change hands in January. Joining us now to make sense of all of it is Dan Clifton. He's a partner and head of Washington Policy Research for Strategas Research Partners. It's a Baird company. Now, he examines just how the moves from lawmakers to change things like taxes, trade, health care, and a whole host of other policies affects both the markets and the broader economy.

1:43Dan, first of all, thank you so much for being here. Let's start very, very broad and macro with your experience examining Washington policy and how it affects markets overall. What was your initial takeaway from just what we saw in the election result and the subsequent reaction in the markets? So first, let me say thank you for having me. This was the most investable election of our lifetime. And that doesn't mean the S &P 500. But what we saw was that the market was pricing in a 50-50 election on election day. They didn't know who was going to win. So as soon as you got the winner, you got a binary result.

2:19Overall, on the general level of the stock market, I think you saw a rally not because one party won or one party lost, but because the market was concerned we weren't going to know who the winner was for one week or two weeks given the close nature of the race. And when we got clarity, that was the most important moment for markets. And we had it very clear, just as you outlined, we knew Trump was going to win, we knew the Republicans had won the Senate, and it was very likely that when the votes get counted that the Republicans were going to take the House. We figured that out about 3 o 'clock in the afternoon the next day.

2:50And so the markets love that clarity. The second step was about a week later when you began to see some of these cabinet appointments starting to go through. And what we began to see maybe Wednesday, Thursday, Friday, so about a week after the election, is that maybe we're moving a little bit more into a more protectionist type of administration. And with that being said, the market started to get a little bit worried. And that pendulum has swung back since then, and you've started to see the equity market come back. So I don't want to say that the election and politics don't really matter for the broad headline.

3:24There were these kind of extraneous factors that we had to work through. But when we look at the S &P 500 returns under any political configuration, over the last 100 years, Republican, Democrat, mixed government, the S &P 500 has produced a positive return under every single configuration. And so the value of elections and the value of policy is understanding sectors and sub-industries and stocks and where the earnings benefit can change from those public policy. And that's what we saw after the election. Stocks levered up to immigration surging. Stocks levered up to government spending falling or clean energy stocks falling.

4:05And that is really the trick of an election. And, Dom, just one last point. What made this election so special? not about the winners and losers but this was the first truly global election because we were dealing with trade policy and so if Trump wins he can put tariffs anywhere in the world he can dictate where earnings and where growth's going to happen globally so you would see these small changes in Trump's probability of winning and it would affect the India currency nearly every currency in the world was moving on this election and we had never seen that before and just to give you kind of context, the stock market most correlated to the election odds was not the U.S.

4:44stock market. It was the Taiwan stock market, given the nature of the issues that are out there. So more people around the world voted this year than any other year in world history. We had a truly U.S. global election at the end of that cycle. And just about every investable asset was in play this cycle around. This was one for the ages. I'm not sure we're ever going to replicate it again, but it was an awesome year in trying to understand how policy can impact financial markets. I mean, Dan, that's an amazing view to have and an insight to have, and with some of the numbers to back it up as well, because I was just thinking to myself how much we can say politics actually plays into the moves that we see on Wall Street.

5:26And it actually looks like it does to a certain degree, but it's not just on Wall Street per se. it's also in places like in Europe and Asia as well. Now, let's kind of take it to that next kind of level, that next layer of the onion, right? So we know that we see moves in the election cycle play out in markets and currencies and everything else globally. Has that changed in a Trump era where the president-elect spends a lot of time making these types of headlines? We haven't really seen the kind of, I guess, rhetoric or the kind of jawboning, saber rattling, whatever term you want to use from president elects typically in the past.

6:12Not as forceful as president elect Trump has made. So are we going to see a bigger result because of the headline statements coming out of the incoming administration? Well, it's definitely not a conventional administration. And just to give you context, when I got in this business 20 years ago, we would look at health care stocks and defense stocks. And it's pretty clear there were some industries that were more sensitive to the election itself. Now we're talking about a wider range of financial assets. And Trump is part of that because he's aggressive. But what I would argue is that this is the way it was before the Berlin Wall went down.

6:49And then the Berlin Wall went down. And when the Berlin Wall went down, the world globalized, geopolitical risk came out of the market, and inflation came down, interest rates came down, and that made things a lot more domestic and a lot more peaceful, per se. And what I'm arguing to you from a global, just from a macro perspective, is that we're moving back to sort of a pre-Berlin Wall going down period, where now you have slightly higher inflation, slightly higher interest rates, more geopolitical conflict going on. And you're starting to see all that kind of wonderful free trade that has benefited us for 30 or 40 years beginning to reverse.

7:27And if that's the case, then just no matter who the candidate is, you're going to see Washington and public policy have more impact on financial markets going forward. And so what I would argue is that this election was an election that was a referendum on the speed at which America would de-globalize. We're going to de-globalize no matter who won the election. But under Trump, it's going to happen faster. And that means that you're going to see much, much bigger moves if Trump wins. And he ended up winning. So that's one key point. But then where he's involved is amazing. I mean, like, think about this.

8:04The appointment of RFK to be Health and Human Service Secretary is just a major disruptor in the food and health care industry overall. And so it's a very different playbook because you were always operating between the 40-yard lines between Republicans and Democrats. Now we're like between the end zones, like the range of outcomes here have widened. And if that's the case, it makes it much more interesting, but to your point, much more impactful for investors. And so I feel bad for people who've been trained in stock picking, like yourself. They're very good. They know how to identify balance sheets.

8:40But you have to have this Washington overlay now, both from a macro and from a bottom-up perspective in terms of how public policy could impact individual securities. It's interesting because it resonates with me as a football fan because, as many football fans know, oftentimes the scoring, right, the actual offense or plays happen in the red zone and not in between the 40-yard lines. So it sure seems as though we're moving towards the red zone. not in any kind of a political commentary, color commentary, anything else, but because we're at the 20-yard line now, and there could be a score anytime soon.

9:17Dan, I want to go back to something that you mentioned that kind of struck a chord with me. You talked about this idea that when there became a more certain outcome for this particular election, that we saw the move higher that we saw in the market, right? This red sweep, it's going to be better for business. It's going to be better for the market. There's going to be maybe theoretically less regulation, you know, that sort of thing. And it all plays out. Right. But there's also and there has been this conventional wisdom. And I know you've heard it before. Right. That Wall Street likes that word gridlock in Washington, D.C.

9:55We are most likely to have gridlock when there is a split Congress or between Congress and the White House. Come January, we're not going to have that anymore. It is the GOP, that red sweep. What does that mean Wall Street should prepare for in the next term, in the, say, the next 6 to 12 months? Gridlock is maybe no more, but there are reasons why it could be, and that has to do with the numbers in the Senate and the House. Is that right? That's absolutely correct. So what I try and do is say, what can we do by executive order where we don't have to worry about Congress, and what do we need to do by Congress?

10:34So I try and separate those out. And what's interesting about this cycle is that you had both Harris and Trump talking more about things you can do by executive order, immigration, deregulation, energy. Right. And so we can walk you through all that. But on Congress, you are talking about the third election in a row where you have less than five seats separating the House of Representatives. Right now, it looks like the Republican majority is only going to be two or three seats. And until they replace the Trump appointments from the House that are going to go into his administration, the Republicans are not going to have a functioning majority overall.

11:09So I still believe even though you got this kind of Republican sweep, you are still in a very gridlock situation because the House is very narrow and the Senate still requires 60 votes on non-fiscal matters overall. And so that's why we're saying, okay, what can we do on executive order? It's very likely Trump's going to shut the border down on day one. And that means that the immigration stocks should do well. And they've been rallying here. Those are going to be for-profit prisons or immigration enforcement level stocks. The second is that it's very likely that Trump is going to remove the emissions requirement on LNG, liquefied natural gas export facilities.

11:49And so when that happens, you're going to get more construction of liquidized natural gas export facilities. It's also going to help the natural gas producer stocks overall. So those are things that can happen pretty quickly. And we would anticipate them right after he gets sworn into office. And then you'll see some deregulation in health care, some for-profit education areas. And I think what people are really watching is whether he gets rid of the IRS tax preparation system, where the IRS is now preparing taxes and competing with H &R Block and into it overall. So there's a lot right there and probably more than what we've seen in the past.

12:25So now you go over to Congress and you say, what are the options in Congress? Well, what do we have to do versus what do we want to do? And what we have to do is we have to extend all the expiring tax provisions at the end of 2025. So we're facing the largest fiscal cliff in U.S. history, the end of 2025. And I think the market looked at that and said having one party makes it easier to get a deal through, even though it's a very narrow majority. And that type of deal would have been a lot harder. We are also going to hit the debt ceiling on January 1st. That will then lead to what we call extraordinary resources being used.

13:05And we're probably going to wind up raising the debt ceiling in July or August. You probably want to have one party control for the debt ceiling as well. So that's why I say it's very nuanced in how you think about divided versus full government. I tend to think that we have many of the kind of gridlock benefits that the market likes, but we also have one party control in the areas that we have to deal with legislation. If we don't extend all of those tax cuts, you'll have a$400 billion tax increase on middle class families next year. And obviously, if we don't raise the debt ceiling, which we will, but if we don't raise the debt ceiling, you would have a pretty catastrophic event in financial markets because it could lead to a default on the U.S.

13:44debt. All right. So those are all points that, you know, are kind of like the known unknowns, right? We are prepared because those things are actually on a calendar. We can see those deadlines coming up. We can kind of see based upon forecasts that some of the government spending issues that are going to arise. So there are ideas that have a lot of debate on Capitol Hill. And then there are policies that can actually get done and get implemented, to your point there. How do you actually determine what is worth paying attention to and actually making portfolio moves for? And then what is worth just sitting back, letting it play out, because at the end of the day, it might just be noise?

14:29Yeah, so I would say that there's really three parts of our process. Number one is we look at what the macro effects of Trump or Harris are going to be. And so we made a decision that we think Trump is a strong dollar candidate and that he is going to lead to higher bond yields. And so from a macro screening perspective, we could say, OK, what's the impact of a higher dollar? Well, a higher dollar is going to be good for U.S. domestic companies relative to multinationals. And what's the effect of higher bond yields? Who is that going to affect? Well, homebuilders would be negatively impacted if mortgage rates are going up because bond yields are going up, right?

15:07And so before you even get into policy, we just kind of want to know what that top of the surface is going to be. And then we break ourselves down into what can actually pass into law. And that's why I say the executive orders are very easy. What can Trump do? The second is what is likely going to happen on trade policy. And so on our view, Trump is very likely going to put tariffs on China. He's going to threaten to put tariffs on the rest of the world. That remains to be seen if he's going to do that. So what we do is we look at where the exposure is to China. And we have ways of doing that.

15:43We look at companies that have revenue in China. We can look at that. It's very quantitative. And then what we do here is that we go through the lobbying disclosure reports of every U.S. company. So we see which companies are lobbying on China tariff-related issues, and we screen them out. And what you see is there's some industrial companies, some tech companies, some life science tool companies. And we figure out where that exposure is. And it's pretty cool stuff and very differentiated than what other people do in our business overall by using that kind of public lobbying data to get to those answers.

16:18And then we figure out, OK, what is likely going to pass into law in Congress? So I'll just tell you, this is the first election in my lifetime where I saw defense stocks rooting for a Democratic presidential candidate to win. It just never happened before, right? But Trump says he's going to end the wars and, you know, you can logically get to that point of view. And yet we want to be a little bit differentiated because we want to know what Trump's priorities are and their space and their sea cables. And they're all different things that he's involved in that are high in the air and below the ground.

16:52And those are areas that we want to be invested in if Trump wins, because we're not saying defense is going to go down. It's just going to get reallocated. And we want to know where that reallocation is. So that's our process. I hope I'm answering your question on kind of how we drill deeper into it. Sure. So so can I follow up on that then? Because you've kind of laid out some of the broad strokes. Can you actually help us understand and break down the areas of policy? You mentioned a handful of them just now, right, that that tend to have the most direct impact on the trade on Wall Street, so to speak.

17:25Right. I mean, you kind of these defense stocks, you have health care, maybe. And by the way, let's talk about regardless of who's in office, because there are some obvious, you know, we talk about Trump trades versus Harris trades. But there are certain areas that you focus on that are always going to be a focal point, no matter who's in power in the White House. economic policies, of course, obvious, right? The Fed is also watched closely by investors. But what exactly is, what takes up the bulk of your time? Yeah. So excellent question. So I would say that every company is focused on taxes and trade right off the bat, because that impacts them.

18:03And I think the market just kind of slept on what the 2017 corporate tax rate cuts were going to do. And then it happened and they were like, whoa, look at all these forward earnings estimates going higher. And not just on domestic income with the rate, but the way we change the international rates, the way we allowed trillions of dollars to get repatriated back. So tax has a really outsized impact on all companies. Now trade is really the big issue. Because in our view, if you just hit tariffs in China, it's$50 billion. We're a$25 trillion economy. me, it really affects individual companies. It may not affect the macro.

18:41But what's interesting to us is that if Trump comes in and doubles those tariffs on China that he did in 2018, then what we'll see is the supply chains begin to move. And then when the supply chains move, where are they going to go? Well, we think they're going to go to India. We think India is the greatest beneficiary of that. They'll go to other places as well. And so those are kind of the macro areas that we try and find. But I'll give you this great data point. In 2005, the SEC made companies fill out what their top risks were of their company. And they do it every year. They do it on their forms.

19:14And from there, we can gauge where that is. In 2006 or 2008, we'll say the financial crisis, 26 % of companies said the government was their top risk. Most of those companies were healthcare, defense, and to a certain extent, utilities, right? And that makes cents. Today, that number is 52%. 52. We've doubled. Half of the S &P 500 is saying the government is their top risk. That is amazing to us, right? And so now it's broadening out. Now it's in industrials. That's infrastructure bill, Inflation Reduction Act, CHIPS Act, those types of issues. It's technology companies, which have always had the lowest risk.

20:01And very interestingly, again, watch this. You know, Trump is going to win, dollar higher, yen lower. There's your yen carry trade. He's actually exacerbating the yen carry trade. And as you know, that then feeds into technology stocks. And so we had been like long NASDAQ and technology stocks into a Trump victory. Again, something I never thought I would do. And then finally, you got the banks. The banks are the big trade or were the big trade into the election because it's very likely that you're going to have less financial regulation. That's in Basel III. It means more merger activity. Those are the broad areas that we get asked about.

20:40And now the big one, I think, that's changed over the last couple of days is the Department of Government Efficiency, DOGE, which is a major topic amongst investors. And is that going to impact the government contractors? I'll give you this point. I mean, people knew that clean energy stocks would get hit on a Republican sweep. That was not a hard thing to figure out. But the government contractors, the companies that receive the most revenue from government services, have actually done worse than the clean energy stocks here under the anticipation that there will be contracting reforms and spending cuts under a Trump administration.

21:19So that's a lot to keep us busy. But it's now across all sectors. And it used to be a lot more narrower this time, years ago. And today, it's impacting every sector, every company. And that's why we think every company needs to have some sort of window into how the government is operating and how it can impact their company, because it could meaningfully impact their earnings.

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