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 | American Resilience Model Portfolio |
| Monthly Portfolio Review: November 2024Publication date: December 1, 2024 |
| | | Current portfolio holdings |
|  | | FOR SUBSCRIBER USE ONLY. DO NOT FORWARD OR SHARE. |
| | | The American Resilience portfolio delivered a total return of 6.8% in November, versus a total return of 5.9% for the S&P 500 Index. Trump’s big victory and the generally unexpected Republican sweep of Congress drove broad-based upside in stocks. Investors are responding to Trump’s pro-growth agenda, which involves low taxes, deregulation, energy production and a focus on technological and industrial development. Eaton (ETN) and Williams (WMB) led the portfolio this month, gaining 14% and 12% respectively. Both are clear beneficiaries of Trump’s policy agenda. Thermo Fisher Scientific (TMO) declined modestly, with Health Care stocks trailing the rest of the market. While the stock market has certainly performed quite well this year, with the S&P 500 Index up about 28% year to date, the political and regulatory backdrop is becoming highly favorable for many of our holdings. We are optimistic that the incoming administration, under the leadership of Scott Bessent at Treasury, will be able to generate non-inflationary growth that keeps long-term bond yields subdued.
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| | | The American Resilience portfolio delivered a total return of 6.8% in November, outperforming the S&P 500 Index, which returned 5.9%. For the three months ending November 30, 2024, the portfolio generated a total return of 9.3%, versus 7.2% for the S&P 500.
The portfolio’s top performing stocks in November were Eaton (ETN), which returned 14%; Williams (WMB), which returned 12%; and Costco (COST), which returned 11%.
Two out of the fifteen stocks currently in the portfolio produced negative returns. Thermo Fisher Scientific (TMO) declined 3%, while Texas Instruments (TXN) declined 1%.
MAGA mandate
The election was of course the most important event of the month. As we indicated last month, markets were edging higher prior to the election in anticipation of a Trump victory, which was seen as increasingly probable in betting markets as we approached the home stretch.
In retrospect, JD Vance’s command performance in the Vice Presidential debate on October 1, 2024 marked a turning point in the campaign. The debate seemed to have snuffed out any lingering momentum Harris-Walz enjoyed after the Democratic convention. |
|  | | Before Election Day, markets considered a Trump victory more likely than not. As we indicated last month, our own sense of the election also favored a Trump victory, given the mathematical challenge Kamala Harris faced.
With the sunbelt swing states heavily favoring Trump, Harris likely needed to win all three of the midwestern “blue wall” states, which at the time appeared to be very close races. It is difficult to win three coin tosses in a row.
What was not anticipated by markets was the magnitude of the Trump victory and the Republican sweep of Congress. The Harris-Walz campaign lost every swing state and was defeated in the Electoral College by 312 to 226.
Despite mainstream media sources and their polls continuously telling us this would be an extremely close election that could go either way, the final outcome was in fact quite lopsided. Trump even won the popular vote, which was seen as highly unlikely in betting markets like Polymarket prior to Election Day.
Republicans were generally expected to win the Senate but were given less than 50% odds of holding onto the House of Representatives. Ultimately, Republicans won majorities in both chambers of Congress.
The red wave or MAGA sweep is significant because it paves the way for meaningful action by Trump’s party for at least the next two years. We are not facing a gridlock situation.
Republicans not only control Congress, but the magnitude of the Trump victory means there is broad-based psychological support behind Trump’s proposed reforms. Some may even be inclined to apply the term “mandate.”
While markets were already to an extent pricing in a Trump victory, substantial additional upside was realized because of the scale of the victory. We saw strongly positive performance following the election in areas of the market that stand to benefit the most from MAGA policy shifts. |
|  | The S&P 500 performed well across the board in November, but sectors that would particularly benefit from an improved growth outlook did especially well, including Consumer Discretionary, Financials, Energy and Industrials.
While we generally focus on large cap stocks, it is worth noting that small and mid-cap stock indices (which are more sensitive to macroeconomic conditions and growth expectations) did especially well after the election. The Russell 2000 Index of small-cap stocks delivered a total return of 10.8% in November, while the S&P Mid-Cap 400 Index returned 8.7%.
The worst performing sectors were Materials and Health Care. Certain stocks within the Materials sector underperformed due to perceptions of tariff-related impacts. In Health Care, a sector which is generally defensive rather than growth-oriented, pharmaceutical stocks were pressured, especially after Robert F. Kennedy, Jr. was named as the next Secretary of Health and Human Services.
RFK’s appointment should not have come as a surprise but does represent a challenge to certain health care companies, and perhaps also food industry stocks, whose profit models run counter to some of the objectives of the Make America Healthy Again agenda.
Eli Lilly (LLY), which is the most highly valued Health Care stock in the U.S., suffered a notable setback in the wake of MAGA/MAHA victory. With a market cap of approximately $750 billion, LLY’s GLP-1 drug franchise (including Mounjaro for diabetes and obesity) may see lower growth as policies shift in favor of more traditional and less costly approaches to weight management. LLY shares were down 4% in November after having underperformed in the lead-up to the election. |
|  | Crypto surges, as gold ebbs
Arguably the biggest winner of the red wave was the “digital assets” ecosystem. Trump and the MAGA movement have fully embraced cryptocurrency and blockchain technology as key elements of the American financial system of the future.
Trump’s choice for Treasury, Scott Bessent, has been a crypto advocate, while the next Commerce Secretary, Howard Lutnick, currently runs Cantor Fitzgerald, a Wall Street firm that has been very active in crypto and fintech.
Lutnick has disclosed that he personally owns several hundred million dollars worth of Bitcoin. Additional pro-crypto appointments are expected, including the eventual replacement of Gary Gensler as Chair of the Securities and Exchange Commission.
Gensler fought the Bitcoin ETF conversion in court and is widely viewed as the nemesis of the crypto industry. There are also rumors of a potential “crypto czar.”
Republican majorities in Congress are also important for the crypto industry as it increases the odds that we will see passage of favorable legislation. This includes the creation of a strategic Bitcoin reserve, as proposed by Sen. Cynthia Lummis of Wyoming.
There is also now a broad push underway to create a “digital assets framework,” which will facilitate the integration of new digital technologies and tools within the financial system. We are likely to hear much more about the “tokenization” of the capital markets in the years ahead as blockchain technology gets implemented. |
|  | Despite Gensler’s best efforts, the two largest cryptocurrencies, Bitcoin and Ethereum, are now widely available as Exchange Traded Funds (ETFs). Both of these crypto assets surged approximately 40% in November. The gold price, by contrast, fell approximately 4%. |
|  | Gold has performed extremely well all year (up approximately 28% through the end of November). The mild weakness after the election should be viewed in the context of much larger year to date gains.
We attribute the post-election downside in gold to a number of factors. Gold had advanced about 4% in October, part of which can be tied to fears of a contested election and political chaos in the United States. This worst case scenario geopolitical risk factor did not materialize, which led to some reversal in the gold price.
The dollar has also strengthened since Trump’s victory. The Dollar Index (which measures the U.S. dollar relative to a basket of international currencies) advanced approximately 2% in November, as global capital flowed into surging U.S. equity markets. A strong dollar relative to other currencies tends to bring down the value of gold in dollar terms. |
| Delivering the “golden age”
Trump has promised voters a golden age of peace and prosperity. He intends to make this happen through pro-growth economic policies which revolve around lower taxes, smaller government, deregulation and expanded energy production.
There is growing optimism in markets around Trump’s economic agenda, which we share. Importantly, Trump’s policies build upon underlying technological trends that have supported U.S. equity markets over the past two years, despite political headwinds and global chaos.
From the standpoint of the stock market, as the Trump growth agenda gets pushed out, one variable that the administration needs to navigate very carefully is long-term interest rates. A rise in long-term interest rates could spoil the party for investors by lowering valuation multiples and creating a headwind for growth in many sectors (like we witnessed in 2022 when rates backed up in response to rising inflation and Fed tightening).
Growing the economy while keeping interest rates and long-term inflation expectations in check will be somewhat complicated. Trump’s selection of Scott Bessent, a seasoned global macro hedge fund manager, reflects his understanding of this challenge. Bessent has spent his entire career trading around movements in interest rates and currency markets.
Long-term Treasury yields had declined substantially in the fall, as weak jobs reports prompted the Fed to pivot towards rate cuts. Yields have since risen on the anticipated pick-up in growth with Trump in office.
As Trump’s chances in the election started to look better in October, we saw a run-up in long-term Treasury yields to their highest levels since the summer. The upward movement in yields continued immediately after the election. |
|  | | In recent weeks, however, long-term Treasury yields have started to head down again. This reversal was helpful to stock prices as the month came to an end.
To a large extent, the recent decline in Treasury yields can be attributed to the selection of Bessent and the perception that the Trump administration will be focused on fiscal restraint. The Musk/Ramaswamy-led Department of Government Efficiency (DOGE) will likely work hand in hand with Treasury to put an end to the runaway government spending that has occurred over the last four years. To keep interest rates down, the bond market needs to see this. |
|  | A key factor for success for the incoming administration will be its ability to keep long-term interest rates subdued. This matters for stock market valuations but also borrowing costs as post-Biden America tries to grow its way out of the $36 trillion federal debt burden that Trump is inheriting.
With the most important economic policy role in the administration, Scott Bessent has his work cut out for him. We are optimistic he will succeed both in terms of developing a sound economic framework for the administration and serving as an effective and reassuring communicator to markets. |
| Too much good news?
The S&P 500 is now up some 28% year to date. We understand there is some concern that markets are overextended, a theme which is receiving plenty of attention in the press.
Doom and gloom will always play a prominent role in the financial media. With Trump as President, we may see even more of this, given the ideological orientation of most corporate media sources.
Financial news coverage is, after all, provided by the same media organizations that produced poll after poll telling us the election would be extremely tight. This of course includes that now infamous Iowa poll a few days before the election which put Harris up by 3% in that state. (Trump ended up winning in Iowa by more than 13%.)
Tariffs are an area of particular focus for the financial media, which has a tendency to catastrophize the potential impact. While tariffs can be disruptive and on the margin inflationary, they primarily serve as a negotiating tool for the administration. To make the threat of tariffs credible, we may see some implemented, but the administration is unlikely to support highly destructive and counter-productive policies when all is said and done.
The path of the stock market is never straight up, and there is always risk of sentiment shifts and a correction. Over time, however, investors who have maintained a permanent allocation to the stock market—and avoided the temptation of market timing—have been rewarded. It is worth noting, as of November 30, 2024, the S&P 500 Index has compounded at an annualized 10.7% rate of return over the past 20 years.
Setting aside general arguments favoring long-term stock market exposure, we do now have many reasons to be optimistic about the economic backdrop.
The U.S. is now shifting away from political leadership that prioritized government-led redistribution of resources to favored groups. We are also moving away from an attitude of intense hostility towards the energy sector and energy-intensive industries.
The new administration is focused on growth, boosting the private sector, constraining the public sector and promoting American competitiveness in the industries of the future. It is also focused on establishing a more peaceful and stable international environment.
The favorable shift in the political environment coincides with rapid developments in technology and potential productivity gains that are supporting demand across multiple sectors of the economy. The AI revolution is just getting started, and Trump has not yet even been inaugurated.
Investors should always be prepared for volatility and unexpected challenges. Likewise, valuation discipline should always be exercised when it comes to stocks. Across our Model Portfolios, balancing valuations with long-term prospects remains a top priority. We want to own great companies but not when valuations become unrealistic.
As we recently explained, when it comes to potentially stretched valuations, much of the focus lately is on the handful of mega-cap technology stocks that dominate major indices.
Sweeping commentaries about the market as a whole often fail to pay sufficient attention to how the Magnificent 7 distort aggregate metrics. Our Model Portfolio holdings focus on differentiated opportunities outside of the Mag 7 mega-caps, to which we believe many of our subscribers already have ample exposure via index funds.
What about Bitcoin?
When we suggested a portfolio allocation to Bitcoin in September, it was trading at substantially lower levels, in the vicinity of $65,000. With Bitcoin now coming close to $100,000, it is natural to question whether it is time to sell or too late to buy.
The recent success of Bitcoin is arguably an exaggerated version of what we have witnessed in the stock market. Prices are higher, but the outlook has improved. In the case of Bitcoin, the outlook has improved dramatically. The U.S. is transitioning from a policy of hostility to digital assets to one that sees digital assets as a critical growth driver.
We continue to view Bitcoin (and other digital currencies) as a promising emerging asset class that will continue to be highly volatile but potentially highly rewarding as digital assets become adopted and institutionalized.
Bitcoin now has a much higher price tag than it did a few weeks ago, but the MAGA sweep represents an unmitigated positive. Therefore, we continue to support the idea of prudently sized long-term allocations within investment portfolios. |
| | | The top performing stocks in the American Resilience portfolio in November were Eaton (ETN), which returned 14%; Williams (WMB), which returned 12%; and Costco (COST), which returned 11%.
There were two holdings which delivered negative returns during the month. Thermo Fisher Scientific (TMO) declined by 3%, while Texas Instruments (TXN) declined by 1%.
ETN, which we profiled in last month’s report, is the most recent addition to the portfolio. As a key supplier of electrical equipment to data centers and utilities, ETN is a natural beneficiary of Trump policies to accelerate growth in AI development and all the electrical power generation, storage and transmission required to support it.
Industry analysts are tracking some $400 billion (and growing) of announced “mega projects” involving data centers, power plants and related industrial initiatives. Investors are gravitating to ETN in the aftermath of the election as the permitting process around these important industrial projects should become streamlined. This increases the pace at which the projects can be completed and the likelihood of more projects getting announced.
ETN is a great play on the electrification theme, which should pick up even more momentum under Trump, but also has material exposure to the positive outlook for the aerospace industry, which is worth recognizing.
In the aftermath of the pandemic, there is pent up demand for aerospace equipment. Because airlines delayed purchases of new planes, airplane fleets have aged considerably, which creates robust demand for aftermarket parts and service. |
|  | | While the fleet ages, demand for air travel, driven in part by growing global affluence, has resumed its structural upward trend. This means more aircraft will have to be purchased in the years ahead, which also benefits aerospace equipment suppliers like ETN. |
|  | | Although ETN trades at a meaningful premium to industrial sector peers because of its superior growth profile, it is extraordinarily well-positioned to capitalize on positive and enduring changes that are now taking place within the global economy. |
| WMB has emerged as the top performer within the American Resilience portfolio since the portfolio was initiated on March 1, 2024, delivering a total return of 69%. Similar to ETN, WMB is nicely positioned for the changing industrial landscape under Trump.
WMB delivered a well-received earnings report during November, meeting expectations, but investors are really focusing on a number of exciting growth opportunities that are opening up for WMB with Trump as President. In addition to general expansions of its natural gas pipeline network, WMB has the opportunity to supply and build dedicated natural gas-fueled electrical power generation facilities for new AI data centers.
WMB is also a key beneficiary of the expected U.S. pivot under Trump towards promoting exports of Liquefied Natural Gas (LNG), which will require extensive infrastructure investment.
It was only a few years ago that many investors at the height of the ESG craze were souring on stocks like WMB. They were even talking about natural gas as a “stranded asset,” with the now clearly delusional idea that the U.S would ultimately somehow be powered by wind and solar alone.
The upside in WMB shares we have seen this year partly reflects a transition from this unrealistically dim view of the long-term prospects of natural gas to one that more fairly acknowledges the substantial growth opportunities ahead.
COST continued to demonstrate superior merchandising ability when it reported 6.5% global same store sales growth in early November. COST is arguably the most effectively managed retailer in the world. Although tariffs represent a potential risk factor for general merchandise retailers, they could provide COST with a competitive edge given its superior sourcing and logistics capabilities and cost structure.
TMO shares were relatively weak given the lack of enthusiasm within Health Care relative to other sectors of the economy.
TXN was also down slightly in November but performed more or less in line with the broader semiconductor group. |
| | |  | | |  | | |  | | | Oracle Corporation (ORCL) |
|  |  | | |  |  | | |  |  | | |  |  | | |  |  | | Arch Capital Group (ACGL) |
|  |  | | Air Products & Chemicals (APD) |
|  |  | |  |  | |  |  | | |  |  | | Thermo Fisher Scientific (TMO) |
|  |  | | |  |  | | |  |  | | |  |  | | |  |  | | The 76research American Resilience Model Portfolio is designed to provide exposure to businesses that operate with competitive advantages in structurally attractive markets. The objective is to identify businesses that can survive and thrive across different macroeconomic environments and whatever geopolitical crises may unfold. The holdings are intended as long-term investments to drive portfolio compounding with minimal need to realize taxable gains. Emphasis is placed on critical markers of business quality such as barriers to entry, physical scarcity of assets, balance sheet strength, effective capital allocation and durable long-term growth drivers. These assessments are paired with careful consideration of valuation, risk and embedded expectations. |
| | FOR SUBSCRIBER USE ONLY. DO NOT FORWARD OR SHARE. |
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