Weekly sound bite: As stocks get more expensive, some could win under a Trump presidency

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Insider sentiment is cooling off sharply as the broad US market as tracked by the SPDR S&P 500 Trust ETF (SPY*US) has risen about 10% over the past three months. Although the S&P 500 has not made new all-time highs in 2016, it is within striking distance of its all-time high of 2,134.70 set in May last year. While stocks could take-out that high-water mark shortly, insider sentiment is slipping in the three most economy-sensitive sectors: Energy, Basic Materials and Industrials. Therefore, it is not surprising that our overall US Market Indicator is also falling and is now below the 50% mark. At 50%, there are twice as many stocks with key insider sales as buys. With sentiment sliding, we have the US market on watch for a possible downgrade to overvalued based on insider sentiment.

Perhaps insiders are concerned that the Fed will start talking rate hikes again which could risk another sharp market decline as experienced in the early winter. However, given the Fed's wait and see attitude that was evident in Wednesday's policy decision announcement (where it left overnight rates unchanged), I doubt the risk of a rate hike is very high, at least not until after the November elections. Instead, something more basic is probably driving their caution such as concern that valuations are moving up too far, too fast.

According to INK estimates, the average stock in the United States is now trading at a trailing twelve-months price-to-earnings ratio of 20.6 which is high by historical standards. Nevertheless, with the Fed on hold, stock valuations may not come down anytime soon, short of some sort of shock or rapid turn in investor sentiment (i.e. rise in fear).

Investors Brace for Trump Podium Shock

One factor that might get investors nervous as we head into May is the upcoming US presidential elections. With his latest victories in the Republican primaries this week, Donald Trump looks unstoppable in his road to assuming the GOP nomination for president. Investors may be reluctant to buy stocks this summer until they become more comfortable with his policies. Currently, the GOP front runner has conjured up pictures of immigration walls and trade wars. Eventually, we expect investors to assume these positions are primarily being made to both get votes and set-up negotiating positions. However, until investors become more comfortable with "the Donald's" style, American stocks could be vulnerable to Trump podium shock.

While investors may be distracted if not over-whelmed by some of Trump's positions on immigration and trade, the front-runner has laid out some other fairly consistent economic themes on the campaign trail. In particular, rebuilding American infrastructure (which may or may not include a wall with Mexico) and defense systems are emerging as clear priorities. So just how will Mr. Trump pay for these? Bond king Jeffrey Gundlach has an idea: more debt. In an April interview with the Financial Times he said, "I think that Trump would have much higher deficit; he talks about leaving social security completely alone, cutting taxes and spending a lot of money. Donald Trump's a debt guy, he knows about borrowing a lot of money." You can read an ungated version of the interview here courtesy of CNBC.

That leads me to think that Aerospace & Defense along with Construction & Engineering stocks could benefit under a Trump presidency. Within those groups, the three highest ranked large US-listed stocks on the basis of our INK Edge outlook V.I.P (valuations, insider commitment and price momentum) criteria are Rockwell Collins (COL*US), Fluor (FLR*US) and United Technologies Corporation (UTX*US). 

In Canada, three of the top ranked relatively large by Toronto standards names include Magellan Aerospace (MAL*CA), SNC-Lavalin Group (SNC*CA) and Heroux-Devtek (HRX*CA). There is of course no guarantee that these stocks will go up with or without a Trump win. I do believe, however, that now is the time for investors start cutting through the campaign hyperbole to try and identify themes that could do well under the likely GOP and Democratic nominees.

I will take a look at possible winners under the Democrats later this spring. One Canadian stock not likely to win under either Bernie Sanders or Hillary Clinton is Canadian drug firm Valeant Pharmaceuticals International (VRX*CA). Consequently, it could also be one of the winners under Trump who seems to have other priorities than going after drug firms.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed today's interview, catch the replay here: http://bit.ly/1N2WzVk.

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