Investors take stock of a Trumped-up market

Phil Grodnick, who started in the investment industry in 1958, won't say who he voted for for president, partly because he's got clients of all political stripes at his Minneapolis Portfolio Management Group.

Grodnick, 79, a patient, value-oriented investor whose composite stock portfolio has outperformed the S&P 500 benchmark index over the last 20 years, will say he's glad stock investors, so far, look positively at President-elect Donald Trump.

"The market is responding to what will be the Trump policies that he articulated as best he could during the campaign," Grodnick said. "Lower taxes, infrastructure spending, reform of the Affordable Care Act, tax reform, repatriation of $2 trillion to $4 trillion in corporate profits from overseas. Growth.

"With that could come some inflation. And bonds are declining in value as interest rates go up. Back to normal levels. Over time."

Grodnick, like other equity managers, has chosen to look beyond Trump's incendiary campaign rhetoric to divine his economic strategy.

"I listened to both candidates to try and understand policy … and I couldn't get enthused over either one," he said. "The market now says Trump's policies make sense."

Doubters gulp. The volatile Trump has stunned many business, political, environmental and human rights leaders with vows to rip up trade agreements, ship millions of foreign-born U.S. workers back to native countries and reignite the polluting coal industry even as utilities are moving to natural gas and wind. Also disconcerting has been his praise for Russian President Vladimir Putin as he slammed historic trade and defense partners from Europe to Japan.

However, the U.S. economy and that of global partners has improved; employment and wages are rising.

Martha Pomerantz, a partner and portfolio manager at the Minneapolis office of Evercore Wealth Management, noted the stock market drifted in recent months as investors watched the volatile presidential campaign. The early money is now voting.

"I think it's a good time to be more equity-oriented," Pomerantz said. "Trump is talking about growth in the economy and things he will do to stimulate it such as infrastructure spending and military spending.

"And things are continuing to get better in the economy and corporate earnings are turning up. Global economic indicators have turned up."

The S&P 500 trades about 15 times projected aggregate earnings per share over the next year, according to Pomerantz. The 25-year average is about 15.9 times, so stocks are not viewed as too expensive.

The outgoing Obama administration proved good for the wealthiest Americans and long-term stock investors.

The S&P 500 index of America's 500 largest companies has risen from under 750 at the bottom of the Great Recession in early 2009, shortly after Obama took office, to recent highs of around 2,180, or about 190 percent, not counting reinvested dividends of about 2 percent annually.

The best-performing Minnesota company since 2009 was Select Comfort, up a stunning 7,775 percent in the eight years through Thursday. However, that performance was obtained after the electronic-mattress manufacturer nearly failed in 2008 and the stock fell to around 25 cents per share.

Clearfield Products, the small, fast-growing manufacturer and distributor of fiber-optic products for digital communications networks, rose 1,520 percent over the same period. Winmark, the lightly traded seller of used sporting goods and other products and business services through franchisees, was the only other local company to top 1,000 percent over the last eight years.

Other top performers include G&K Services (718 percent), which is being sold to a larger competitor in the uniform-supply trade; and Valspar (539 percent), which also has sold itself. Manufacturers Polaris and Toro also provided 500 percent-plus returns to shareholders since 2009.

Local portfolio managers say the early winners in the Trump stock market are industrial companies, such as Caterpillar and 3M Co. Bank stocks soared last week amid forecasts of rising interest rates, increasing loan spreads and less regulation. Oil, gas, coal and pipeline companies favored by Trump should do well, even as wind and solar have taken off in recent years thanks to declining costs and environmental considerations. Defense stocks are rising as Trump indicates he will increase spending even more for a military budget that has grown under Obama.

Trump has said so far that he's not worried about yawning budget deficits projected by skeptical economists who fear tax cuts for big businesses and the wealthy at the same time as spending increases for infrastructure and military.

Jim Paulsen, chief investment strategist at Wells Capital Management, noted the rally last week, following election-time uncertainty that investors despise, only returned the S&P 500 to where it was weeks ago. The economy is growing at a heady 3 percent clip.

"A lot of the positive trends, the fundamentals, were in place before the election," Paulsen said. "The economy grew 3 percent in the third quarter and the fourth quarter looks like 3 percent. Commodity prices have risen. Corporate earnings are improving. Inflation will add to corporate earnings and wages. The election result was unexpected and emotional. I think the pace and degree of change will be far less and slower than expected. We have the power on the Republican side of the aisle in Washington, D.C. But we really have an independent in the White House. There will be great disagreement. The reality is change will be far less dramatic. The economy is reaccelerating. I like the outlook for stocks."

Grodnick believes Trump and Congress will further stimulate the economy. It's conjecture at this point, but the bulls are snorting.

"I've been in this industry since 1958," Grodnick said. "It's very expensive to be pessimistic."

Neal St. Anthony • 612-673-7144

Patrick Kennedy • 612-673-7926