Donald Trump Isn't the Only Thing Investors Should Worry About

The cards are markedly stacked against Trump when it comes to winning in November. Most national polls show Hillary Clinton beating him in the general election, even though she is nearly as unfavorable to registered voters, according to an NBC/Wall Street Journal survey.

Renaissance Macro Research calls Trump’s “net negatives prohibitively high.” And as I shared with you way back in August of last year, Moody’s Analytics forecasts a win for the Democratic nominee, whether that’s Clinton or someone else. Since 1980, Moody’s sophisticated election model has accurately predicted the outcome of every single contest, and in 2012 it even nailed the Electoral College vote.

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Trump still has quite a lot of support in the financial industry. A Financial Advisor poll found that a little over 50 percent of respondents say Trump positive for the U.S. economy. The New York billionaire, Gundlach points out, has promised to build up the military and initiate an infrastructure program.

Whomever voters end up electing in November, there will be winners and losers. Again, what’s important to look at are the policies because they’re precursors to change. We’ll be watching the events as they unfold closely and adjusting our allocations accordingly.

We’re now in May, which is when many investors consider whether to sell or stay in the game during the summer months, thought to have some of the worst performance of the year.

While there might be evidence to support this strategy, it’s worth digging deeper before making a decision. Again, this is an election year, and today McClellan Financial reports that in the fourth year of a president’s second term—in other words, when he is ineligible for reelection and we must therefore choose a new president—the market has fallen 1.6 percent on average during the May-October period, based on data from 1936 to 2012. This is caused presumably by the uncertainty over who might replace the incumbent, and how his (or her) policies might affect the market.

McClellan also suggests that May might not be the most opportune time to get out of stocks in these years, as the market has typically bottomed mid-month, then rallied into June and July. That means it might pay to hold out until then to sell off, if that’s what you plan to do.
What’s more, Cornerstone Macro says that “sell in May and go away” only works when leading economic indicators are decelerating. (In such years, returns have been negative 2 percent on average.)

When they’re rising, the summer months have returned an average 6 percent.

So are the leading indicators rising or lowering? Well, the Bureau of Labor Statistics revealed on Friday that the U.S. added 160,000 jobs in April. Although this figure is positive, it represents a seven-year low and is well below the 205,000 that economists had expected.

Manufacturing also shows continued signs of weakness. The April global purchasing manager’s index (PMI), which we follow closely, came in at 50.1, a reading that’s barely above the standstill threshold of 50. In addition, the U.S. manufacturing PMI fell to 50.8, its lowest level since September 2009.

There’s also the news that Chinese banks’ bad credit could actually be nine times larger than previously believed. Although not an “economic indicator,” this should give investors pause, as potential losses could reach as high as $1.1 trillion, according to brokerage firm CLSA.

So there’s a lot of overlapping analyses to consider here. Regardless of how you see it, when you take into account the additional volatility this second-term election year could yield, it might be a good time to consider diversifying into investment-grade, short-term municipal bonds. Munis have been shown to perform well over time, even during periods of market instability and rising interest rates. They’re also tax-free at the federal level and often at the state level if you happen not to live in one of the seven states that doesn’t levy a tax on income.

An old investing rule of thumb suggests that whatever your age is, that is the percentage you should have allocated toward tax-free munis. So if you’re 40 years old, 40 percent of your portfolio should be in short-term munis, 50 percent if you’re 50 years old, and so on.

The bottom line is, if you feel skeptical or fearful of the consequences of Election Day, it might behoove you to look into short-term, tax-free munis.

Speaking at the Sohn Investment Conference in New York last week, legendary hedge fund manager Stanley Druckenmiller warned investors that the equity bull market, propped up by “the longest period ever of excessively easy monetary policies,” is now close to exhaustion. He called negative interest rates an “absurd notion” and noted that central banks are now borrowing more “from future consumption than ever before.”

As such, Druckenmiller is wagering on gold. Heavily. “Some regard it as a metal,” he said. “We regard it as a currency and it remains our largest currency allocation.”

Between 1986 and 2010, the year he closed his fund to investors, Druckenmiller consistently delivered a spectacular 30 percent on an average annual basis. That’s a superhuman feat, one that unequivocally demands we take note of his investment choices. His Duquesne Family Office fund is reportedly up 8 percent so far this year.

In August, I reported on his move to make a gold ETF his number one holding, followed by Facebook (NASDAQ:FB), a choice that has served him well. The yellow metal is currently up 18 percent since the beginning of August.

As always, I recommend a 10 percent weighting in gold—5 percent in gold stocks, 5 percent in bullion, coins and jewelry. Rebalance every year.

Disclosure: This commentary should not be considered a solicitation or offering of any investment product. Certain materials in this commentary may contain dated information. The information provided was current at the time of publication. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Written By: Frank Holmes