By Jeff Reeves, MarketWatch
We have such a short attention span as investors. Not only did Wall Street fully price in the effect of a Donald Trump presidency in two months across November and December last year, but apparently some investors are already giving up on the “Trump trade” before the president’s first 100 days are up.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.18% has dropped 3.1% through Thursday since closing at a record on March 1, although it is still up 11.6% since Election Day. The S&P 500 /zigman2/quotes/210599714/realtime SPX +0.29% has dropped 2.8% from its record close on March 1, trimming post-election gains to 8.85%.
Perhaps more tellingly of what the fast money is doing, financial stocks have skidded more than 8% since March 1.
You can blame old saws like “buy the rumor, sell the news.” Or you can blame newfangled distractions like a cellphone video showing a passenger being dragged off a flight and the nonstop news cycle of outrage that follows.
But let’s not be too hasty. Like it or not, Donald Trump has four years in the White House and Republicans are still in control of both houses of Congress.
We are a long way from the end of the Trump era. And while there have admittedly been setbacks and surprises, investors still should be looking to Washington for cues in 2017.
Here’s what I expect to happen in the coming months based on the initial actions under President Trump and how Wall Street will embrace a new version of the “Trump trade”:
Defense stocks should rise amid Mideast unrest
I’ve been appalled for years at the staggering scale of the humanitarian crisis in Syria . But moralizing never seems to get me anywhere, particularly in the age of Trump, so let’s skip right to the trade: defense stocks. Picks like Raytheon Co. that manufacturer the Tomahawk missiles launched last week are top-of-mind, but don’t forget that the broader Trump budget proposal was heavy on defense — including specific calls to boost the F-35 stealth fighter program run by Lockheed Martin Corp. /zigman2/quotes/200691238/composite LMT +0.22% and production of other jet fighters and sub-hunting aircraft manufactured mainly by Boeing Co. /zigman2/quotes/208579720/composite BA +3.15% .
In light of recent airstrikes and the support Trump has won among hawkish Republicans as a result, it seems highly unlikely that spending like this will be on the chopping block. Keep in mind, too, that the start of a conflict can be a big boost to these picks regardless of whether the conflict is deemed proper or popular in the long-term. After the Iraq “shock and awe” campaign at the end of March 2003, Raytheon surged 24% in two months and Boeing leapt about 20%.
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Tech companies can juice their buybacks with repatriation tax breaks
It’s old news how much cash tech stocks have lying around overseas, but I’ll revisit the math for you. In its 2016 annual report, Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +0.93% reported $113.2 billion in cash, but 83% of that was held by foreign subsidiaries — meaning roughly $94 billion in overseas capital. If that was hit by current taxes by a maximum of 35%, that shrinks to “only” $61 billion. But if Trump gets his way with a tax repatriation holiday rate of around 10%, Microsoft will have access to almost $85 billion.
I’m not naive enough to presume that extra $24 billion in tax savings will go to jobs or factories, but you can be sure it will juice buybacks and prompt a special dividend that lifts Microsoft stock. The same is true for other firms such as Apple Inc. /zigman2/quotes/202934861/composite AAPL +1.69% , Cisco Systems Inc. /zigman2/quotes/209509471/composite CSCO +0.11% and International Business Machines Corp. /zigman2/quotes/203856914/composite IBM -0.15% .