“A win for Donald Trump in next week’s election could take a big bite out of U.S. stocks, according to the latest forecast from Citi.”
So reads a story from CNN, published on November 4, 2016. That was, of course, days before the presidential election. The story went on to say that a Trump presidency could also pose a threat to the long-term prospects of the markets.
At the time, Hilary Clinton was still overwhelmingly favored to win, with HuffPost going so far as to give the Democratic candidate a 98.2% chance of victory.
Of course, we all remember what happened next…
And as the reality of a President Trump began to dawn on people, the warnings became almost apocalyptic. Paul Krugman of The New York Times summed up the thinking. In response to Trump’s election, Krugman said (emphasis added):
If the question is when markets will recover, a first-pass answer is never.
[…]
So, we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.
I’m not sure what Krugman could have been thinking when he wrote that. But he turned out to be wrong.
As the market “digested” the news, stocks began to rally in the days after the election. From election night to the end of 2016, the S&P 500 climbed 3.5%. The Nasdaq climbed 2.5%. And the Dow Jones Industrial Average was up an impressive 6.3%.
And this so-called “Trump rally” carried over into 2017. Today, that year is remembered as one of almost unbelievably low volatility. For that entire year, the S&P 500 did not have a single trading session where the index fell by 2% or more. And as the market entered 2018, investors found another reason to celebrate.
In December of 2017, Congress passed the Tax Cuts and Jobs Act. President Trump signed it that same month. The law, among other things, changed corporate tax from a tiered system as high as 39% to a flat rate of 21%.
Suddenly, many companies found themselves sitting on a pile of cash they hadn’t expected. And while many reinvested that money into their business, many executives deployed that capital in another way. They rewarded shareholders.
In 2018, S&P 500 companies bought back $806 billion worth of stock. That was up from “only” $519 billion the prior year. In 2019, while below the 2018 figures, was still an impressive $728 billion. This is one of the reasons why markets were so buoyant for both years.
I want to be clear on one thing: The purpose of today’s essay isn’t to encourage you to vote for one presidential candidate or the other. That’s not our business. But we are in the business of identifying investable trends.
Many people apply too much significance to the impact a presidential administration (any administration) can have on the direction of the markets. But, every once in a while, administrations pursue policies that have a direct, meaningful, and immediate impact on markets.
That’s what we see today.
That is, of course, if Trump wins…
And there is a surprising group of Americans who are – very quietly – hoping he will.
Trump Visits San Francisco
Earlier this month, something very unusual happened. Donald Trump held a fundraiser for his election campaign. That part wasn’t unusual. What was interesting was where it was held.
A $500,000 per couple fundraising dinner hosted by noted venture capitalists David Sacks and Chamath Palihapitiya in the rich Pacific Heights neighborhood of San Francisco sold out earlier this month. It’s reported that this event alone raised over $12 million for Trump’s campaign.
San Francisco, of course, isn’t “Trump country.” Biden secured 85% of the vote in the last election cycle. And yet, here was Donald Trump in the proverbial belly of the beast, raising millions of dollars with the Bay Area’s wealthiest.
And this certainly won’t be the last Bay-area fundraising that Trump hosts. These parties in Silicon Valley aren’t celebrating his social policies. You won’t see many MAGA hats in Palo Alto, Mountain View, or Redwood City.
But influential people in the tech and crypto world feel shackled by regulatory oversight, and they’re tired of it.
To many, a vote for Trump isn’t about controversial topics such as a border wall or abortion. It’s about money. It’s about the ability to chase a dollar without constraints.
Honestly, it’s not even about Trump at all…
Why One Woman May Be Responsible for Trump’s Election
If Donald Trump is elected as America’s 47th president, there may be one woman responsible for putting him over the top. And it’s probably not who you think.
It’s not Nikki Haley. It’s not Melania. It’s not even Ivanka. It’s Lina Khan, Chair of the Federal Trade Commission (FTC).
Most people probably don’t know who Lina Khan is. But she is top of mind – and a serious concern – in boardrooms across the country.
Lina Khan went somewhat viral back in 2017 when she published an article in the Yale Law Review titled, "Amazon’s Antitrust Paradox."
Khan argued that America’s antitrust laws were outdated. Under current antitrust laws, companies are considered monopolistic if their business practice results in “consumer harm.” This typically means higher prices.
But many of the products and services from the large players today are “free,” or very affordable. Amazon is dominant in e-commerce and cloud storage, but that hasn’t resulted in higher prices. After all, most items on the Amazon platform are reasonably priced, and they ship for free in two days for Prime members.
This was Amazon’s antitrust paradox. And ever since Khan was appointed chair of the FTC at the outset of the Biden administration, the agency’s mission has been to break up big tech or, at the very least, stall any new acquisitions.
It’s interesting to think that a 35-year-old progressive legal scholar could be the woman who gets Trump elected. Frankly, it seems far-fetched. But Khan’s policies might inspire independent voting capitalists to lean right in this election cycle. And she’s definitely a reason why Trump can host fundraising events with wealthy tech investors.
Khan may not have the firepower – or the time – to break up the big tech company. But she has proved effective at stalling M&A activity.
In July of 2022, Khan’s FTC attempted to block Meta from acquiring Within Unlimited, a virtual reality fitness app. Meta eventually prevailed and was allowed to go through with the acquisition in February of 2023.
But the company still had to spend months in court – not to mention spend on legal fees – to get the deal done. That sort of “friction” is not conducive to a healthy M&A environment.
Khan’s hardened views against M&A have turned many in America’s C-suite against Biden, who appointed her. And while few will admit it, many executives are quietly hoping Trump takes office and replaces Khan.
And while Khan has mostly focused on tech, this environment has led to a slowdown in M&A activity across virtually every industry.
The current regime at the FTC is making deal-making, across all sectors, extremely difficult.
In 2023, merger and acquisition (M&A) activity fell 15% to its lowest level in a decade. At the end of 2023, there was approximately $3.6 trillion of cash sitting on corporate balance sheets. There’s even more money piling up in the private/venture capital markets.
Most of the companies would love to put this capital to work, making acquisitions that would be beneficial to their shareholders. But they’re not, at least not yet.
If Khan is replaced by someone with a more laissez-faire outlook – or even by somebody who wasn’t openly hostile – after the election, the M&A floodgates would open.
What does this mean for investors?
A Mountain of Cash
Consider that, at the end of their most recent quarters:
- Berkshire Hathaway had $189 billion of cash.
- Apple had $162 billion of cash.
- Alphabet had $108 billion of cash.
- Microsoft had $80 billion of cash.
- Meta had $58 billion of cash.
Assuming interest rates trend lower over the next couple of years – which is something that I believe will happen, regardless of who wins the election – these companies will feel pressure to put that cash to work because they won’t be able to generate ~5% risk-free returns by owning short-term U.S. bonds.
That’s a lot of dry powder that could be used to bolster earnings via accretive acquisitions. And if Khan is removed under a Trump administration, the friction associated with the Khan era will disappear. That’s also great for M&A.
So, what should an investor do about it?
One strategy is to simply own the companies holding the most cash, the ones that would be most compelled to pursue new deals.
Second, investors who own shares of acquisition targets will benefit from M&A premiums. In recent years, the average M&A premium has been roughly 25%. Imagine you wake up one morning and find that a stock you hold has popped 25% overnight.
That’s a nice payday for investors who can identify potential acquisition targets. And yes, assuming Trump is elected, this is absolutely a strategy we will pursue in our paid services.
Lastly, the companies that broker these deals and issue debt (investment banks) and the companies that perform due diligence and rate credit (credit rating agencies) will see a huge influx of business.
Increased M&A should be a nice growth catalyst for the big money center banks in the U.S. as well as companies like S&P Global and Moody’s Corporation which tend to generate high-margin cash flows when deals occur.
Again, we’re not telling you who to vote for. That’s your business.
But as your subscriber, we owe it to you to share research on important, investable trends. And a flood of new M&A activity certainly qualifies.
Regards,
Nick Ward
Analyst, Wide Moat Research