How to buy stocks for the rest of Trump’s first year
Whatever won in Q1 likely will win again
Is it over for tech stocks? Or worse still, growth stocks? Even worse, the whole stock market?
Headlines have intimated all of that — starting with the sharp tech sell-off June 8. Here’s a little-known secret: Quite unlike most years, in ones like this, there is an easy road map that bypasses all this noise. Simply follow the first quarter’s leaders.
Investing is an odds game, not one of certainties. If you can stack the odds heavily your way, you usually win. Most timing tricks don’t work. Research my firm created shows that whatever happens in stock markets in the first quarter of a president’s inaugural year (and, to a lesser degree, other markets) usually gets amplified in that year’s back half, regardless of whatever happens in the second quarter (right now).
Said another way, ignore right now. Instead, buy — don’t sell — categories that shined as 2017 began. They are likely to come on again soon. That back half is just days away.
As prominent tech stocks plunged, getting FANGed became a front-page verb — synthesizing simultaneous swoons from Face- book, Amazon, Netflix and Google. Within two days, the jargon morphed to FAAMGed to include Apple and Microsoft. Shift to China’s Baidu, and you could get BANGed. I say: Don’t be a DANGed fool! Instead, heed my simple rule. An inaugural year’s first quarter is a great back-half blueprint. Tech did great then, so it probably will soon. My rule works for the stock market’s direction — and major categories such as tech vs. energy or “growth” vs. “value” stocks. Or stocks vs. bonds or major currencies! Overall, with stocks up then, expect strength ahead. Don’t drop tech or previously strong categories when headlines tell you to.
That includes foreign stocks which weakened in recent weeks Before I started writing for USA TODAY, I detailed much of this in a column April 24 for The Finan
cial Times — including that it works for foreign vs. U.S. stocks.
For example, since 1929, in the 11 inaugural years when foreign stocks started off leading, they did so in the back half 10 of 11 times. Better still, in those back halves, that leadership increased even more — to do on average more than 10% better per time — big. That one back-half lag wasn’t big. Go with the odds. Foreign stocks returned 7.86% in the first quarter. U.S. stocks did 6%. Maybe, if my basic rule is wrong, foreign lags some through December. You could do far worse.
Why has this worked — even overseas? “Why” is always tougher to be sure of than “what.” My take? Our election and subsequent new administration wiggles wrung some uncertainty from our markets early on. Love or hate President Trump, we know he can get far less done than some feared and others hoped. That certainty means less uncertainty. Markets love falling uncertainty — largely baked into U.S. stock prices. Markets love most where uncertainty falls fastest. And uncertainty should fall faster overseas as their elections ripple into greater clarity of administrations ahead.
If you’re a U.S.-only investor, stick with the first quarter’s winners: big tech, drugs, stocks of expensive consumer products and other big growth stocks. Avoid the early laggards: small stocks and “valuish stocks” — those with below-average valuations, often with high dividend yields and lacking the characteristics of growth. Stay away from energy, materials, financials, real estate investment trusts (REITS) and industrials.
If you want to buy foreign exposure cheaply and easily without being tricky or too cute, buy these two passive exchange traded “tracker” funds for your foreign allocation: 75% Schwab’s “International Equity” (trading symbol SCHF) and 25% its “Emerging Markets” (symbol SCHE). Super cheap and super easy.