This week's meltdown — a more than 370-point drop in the Dow (Dow Jones Global Indexes: .DJI) on Wednesday — showed how the stock market, at its fundamental level, is binary – investors either bet for or against something. In this case it was the "Trump trade." Investors who had piled into the U.S. stock market Trump trade in the months since Election Day were always betting against fears that President Donald Trump couldn't handle the presidency.
We still don't know the answer to that question. The Trump trade could be back on track very soon if Trump can avoid new controversies. But the truth is that, in every buy-or-sell decision, there are two sides that have to be weighed. Next time you buy a stock, think about what you're betting against just as much as what you're betting for.
When I buy a stock, I do more than just weigh the pros and cons on a proverbial scale and see which side is heavier. Bullish reasons for a stock purchase aren't enough.
I want to know the conditions that would turn my bet into a loser because, many times, those are a lot easier to see and to track. Don't get blinded by your bullish thesis. It's a sure way to get blindsided by conditions you could've seen coming your way. And if the conditions or factors you have to bet against became more compelling, having that information would make the decision to buy a lot easier — and faster.
(This approach has the added advantage of protecting indecisive investors from second-guessing after they've acted.) Not everyone is suited to take the Rip Van Winkle approach and set their time horizon to 100 years.
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The winning sectors since the November election — defense contractors, large-cap technology companies, financial services, industrial companies and materials — are the most vulnerable to an unwinding of the Trump trade. Conversely, it is these very sectors you'd want to be adding to if you are betting that Trump's policies, especially tax reform, will come to light.
There are plenty of examples unrelated to Trump. My best current example are the stocks of brick-and-mortar retailers.
You've heard about how consumers' tastes have shifted away from buying material things to paying for experiences. It's why stocks such as Marriott International (MAR) and Carnival (CCL) have done well while Macy's and Target are trading near their 52-week lows. Then there's the mall traffic decline and shuttered shopping centers all around the country, squashing the stocks and bonds of mall owner/operators.
For investors the message is clear: You can't beat the real-life experience of a cruise, but you could buy your cruise wear on Amazon (AMZN). It's another litmus test to use before you buy your next stock. There is virtually nothing you can't buy online and easily return if necessary.
I advise investors to avoid attempting to bottom-fish in the retail stocks that are down a lot but look cheap on valuation. They only look cheap because their shrinking profit margins haven't caught up to their P/E ratios yet. But I expect they will soon, and you don't want to get stuck in a value trap.
You want to overweight shares of oil companies? You'd be betting against the U.S dollar. Most commodities we use are priced in dollars. You want to load up on AT&T (NYSE:T) and Verizon (VZ)? You'd be making a bet against higher interest rates . Same goes for high-dividend-yield stocks and high-yield bonds .
These widely held stocks are perceived as some of the safest stocks one could own. But you're pressing a bet that the bull market in bonds that started in 1982 will continue, driving rates lower as they move counter to bond prices. You have to want to make that bet as much as you'd want to bet on those stocks.
So look at your stock, the underlying company and the overall economy at large — a blend of micro, macro and technical factors. It's all available to you. You just needed to know what to look for in the first place. And the additional, skeptical question to ask.
And never stop asking this question: Just imagine what would happen to insurers and banks if Amazon could get an insurance or banking license. Never? This week Amazon made some hires about moving into the online pharmacy business .
This is not a foolproof method — I have my share of losers, like everyone else — but I learn from each one, and that helps to make me better at my job.
— By Mitch Goldberg , president of ClientFirst Strategy
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