Weekly Research Briefing: All Swept Up

The Biggest Picture: Trump won big, as US voters cared more about inflation, inequality, immigration than low unemployment; big sweep = big policies ($8tn tax cuts, $3tn tariff revenues, $1tn spending cuts) = inflationary boom = sell bonds; but contrarians note lower cost of living politically wise for both Trump & Fed.

2.0 CW: conventional wisdom remains Trump 2.0 = tariffs, immigration controls, tax cuts = “US inflationary boom” & “global deflationary bust” = long gold, long US dollar, long US stocks (NDX & RTY) vs International stocks, short US Treasuries, and that Election to Inauguration Day a risk-on window of opportunity.

A key driver for stocks in the near term will be the reduction in political uncertainty, a dynamic that typically drives strong year-end returns in Presidential election years. The S&P 500 index has historically generated a median return of 4% between Election Day in November and calendar year-end (Exhibit 2). If repeated this year, that return would equate to an S&P 500 level of roughly 6015 at the end of 2024 and reflect a forward P/E multiple of 22x. Along with the resolution of election uncertainty, resilient recent economic growth data and continued Fed rate cuts support the healthy near-term outlook for US stocks.

@JeffWeniger: The P/E discount in Small Caps versus Large Caps is akin to observations made at the turn of the century. The S&P 600 is trading 25.4% cheaper than the S&P 500. We find this valuation relationship in 1976, 1998, 2001 and 2020.

@SoberLook: The average spread for US investment-grade bonds has fallen to its lowest level since 1997.

@neilksethi: High yield spreads this week hitting new 17-yr lows.

Business leaders expect lighter regulation and lower taxes to help accelerate deal activity.

Donald Trump’s convincing election win Tuesday and lower interest rates provide “powerful elixirs” for private equity that are likely to accelerate acquisition activity while boosting investor returns, trends that stand to benefit Carlyle Group, Chief Executive Harvey Schwartz said Thursday.

The election’s conclusion helps remove uncertainty from the market when it comes to “strategy, committing capital and making decisions,” Schwartz said during an earnings call with securities analysts. The results at the polls might induce more executives to move ahead with selling and acquiring businesses, he said.

"Trump in his first -- first time he ran, he was a very pro-business pro-M&A. We've been on the road the last 2 days, and we were talking about M&A lot with investors, a lot with the hedge funds. Not related to just banking, but the last 2 years have been negative on M&A for every industry. We were with a group this morning. We said, what was the large last nonbank merger that happened, and everyone could -- in the room could tell us what hadn't happened. All the ones have been held up or decline, but didn't know the last large one. This -- going into a Trump presidency with probably a house and a Senate Republican, we are hopeful and are expecting that it's going to be more M&A friendly from a scale standpoint, from a time standpoint as well as clear rules." — First Horizon EVP & CFO Hope Dmuchowski

@JBFlint: Warner Discovery CEO David Zaslav says on earnings call that Trump administration could offer "an opportunity for consolidation that would provide a positive and accelerated impact on this industry."

It has been a rough year for betting on big takeovers. Now, some in the hedge-fund industry hope President-elect Donald Trump could breathe new life into the business, by giving American corporations more freedom to pursue major deals.

The optimism is already evident in surging stock prices for some companies, like Discover Financial Services DFS 4.60%increase; green up pointing triangle, that are pursuing combinations. It is part of a broader optimism across Wall Street about potentially lucrative opportunities under a second Trump term.

In recent months, numerous high-profile acquisitions have either struggled to close or failed, including a plan to unite Tapestry and Capri Holdings, the companies behind Coach and Michael Kors. The pileup has ripped through the hedge-fund world, leading to unexpected losses and several top traders losing their jobs.

Now however, the new president’s pro-business, lighter-regulation agenda “means a pro-merger environment that will embolden companies to get bigger through acquisitions; it is as simple as that,” said Orkun Kilic, a London-based arbitrager. “I am very excited for the next four years.”

@carlquintanilla: MORGAN STANLEY: “.. With YTD announcements +25% versus 2023, cyclical and structural factors support an even larger +50% increase in 2025, driven by the return of sponsors and large cap deals.”

Blackstone Inc. agreed to buy Retail Opportunity Investments Corp. in an all-cash deal valued at about $4 billion.

The purchase price is $17.50 a share, the companies said in a statement Wednesday. That’s 34% more than the real estate investment trust’s closing share price on July 29, the day before a report of a possible deal...

Retail Opportunity Investments has 93 shopping centers, focused in the western US. Its property portfolio, which often features grocery stores as anchor tenants, was roughly 97% leased at the end of September.

Ampersand Capital Partners and GHO Capital Partners said they would take biopharmaceutical company Avid Bioservices CDMO 0.16%increase; green up pointing triangle private in a $1.1 billion deal.

The Boston- and London-based investment firms, respectively, said Wednesday they would purchase all of Avid’s outstanding shares for $12.50 apiece. The purchase price represents a 14% premium to the company’s closing price at the end of the regular session, and a 22% premium to its 20-day volume-weighted average share price...

Avid Bioservices Chief Executive Nick Green said the company’s board, which unanimously approved the sale, considered several options before determining to move forward as a private company under new owners.

Activewear maker Vuori will allow some early investors and employees to sell shares in a tender offer that values the company at about $5.5 billion, according to people familiar with the matter.

The tender, also known as a secondary share sale, is about $825 million, said some of the people, all of whom asked to not to be identified discussing private information...

The deal represents a significant jump from Vuori’s $4 billion valuation in 2021 — when the company raised $400 million from SoftBank Group Corp.’s Vision Fund 2 — and establishes it as a formidable American clothier. Another existing investor is Norwest Venture Partners.

@wallstengine: $BA | Boeing is reportedly considering selling its Jeppesen navigation unit as part of efforts to reduce its $58 billion debt load, per Bloomberg. Sources indicate the sale, potentially valued at over $6 billion, has already drawn interest from private equity firms and other companies. Boeing is said to be working with an adviser on the possible sale.

@GunjanJS: "The US is now trading at a record P/E premium to MSCI World ex US of almost 60% and represents 73.65% of MSCI World market cap, also a record high" --SocGen

Making matters more difficult for investors, fiscal policy is just one part of Trump’s agenda that could shift the economy. The president-elect has also put forward ambitious, if ill-defined, plans to introduce broad-based tariffs, impose stricter immigration controls and carry out mass deportations of people who entered the country illegally.

Both tariffs and deportations could spur inflation, pushing yields higher, according to many economists. They could also slow growth, dragging yields lower.

In the case of tariffs, many businesses and economists agree that higher levies on imported goods would be passed on to consumers. Inflation would likely rise, at least in the short term. But consumers could also balk at the higher prices and cut back on their spending.

Deportations, meanwhile, could force businesses to increase wages to lure new workers, and then raise prices. Employers could also respond by cutting back on production.

“It all kind of depends on the scale and scope of tariffs and immigration,” said Ed Al-Hussainy, senior interest-rates and currency analyst at Columbia Threadneedle.

Trump has vowed to impose massive new tariffs, eyeing a duty of 20% on all foreign goods and 60% or higher on goods coming from China. On the campaign trail, he also dropped threats of even-higher rates on specific countries and products.

He faces relatively few constraints in imposing his promised tariffs and doesn’t need to consult with Congress. A 1977 law gives him authority to impose duties in cases of an “unusual and extraordinary threat” to national security, foreign policy, or the US economy. Alternatively, he could use other legal provisions he invoked in his first term to raise some tariffs. Those require a public comment period, which add a delay.

Some Trump advisers have suggested he might use the threat of tariffs as a negotiating tactic with allies and rivals alike and back off the notion of imposing them across the board. Others have suggested that Trump is truly serious this time about rewriting the rules of international trade, no matter the consequences. He’s also pointed to tariffs as a way to help pay for the big tax cuts he’s promised, though economists argue they won’t raise nearly enough money. In either case, tariffs are expected to play an even larger role in his second term.

“We advise readers to take the president-elect’s threats of tariffs seriously if not literally,” Wells Fargo & Co. economists Jay Bryson and Michael Pugliese said in a note to clients Wednesday.

@carlquintanilla: MORGAN STANLEY: “.. we modeled 60% tariffs on China and 10% on the rest of the world, all at once. We estimated that policy would boost core inflation by roughly 0.9pp and reduce GDP growth by around 1½pp. A more phased approach, and one that may be more targeted, would imply smaller effects because they would be spread over time. With an already robust economy, moderate #tariffs would hurt growth but not necessarily cause a recession.”

"Now that Trump has won the U.S. presidential election, the near-term risk of material tariff increases on consumer goods coming out of China has solidified, triggering 2 action items: The first is we will continue our inventory build in the U.S. unabated, likely until the increased tariffs are enforced; and second, we will move 120-volt production out of China SKU by SKU as quickly as possible, which is accelerating the project we started 2 years ago. We expect to be 80-20 on this project by the end of '25, with the first incremental SKU going live around March, plus or minus." — Breville Group MD, CEO & Director Jim Clayton

Matt Priest, CEO of the Footwear Distributors & Retailers of America, a trade group, said the 2019 Trump tariffs worked out to about $1 billion in additional costs for shoes purchased by U.S. companies. By the time the shoes hit store shelves, Priest estimated they cost consumers between $3 billion and $4 billion more.

Columbia Sportswear CEO Tim Boyle recently told The Washington Post he expects to raise prices if Trump increases tariffs. “We’re buying stuff today for delivery next fall,” he said. “So we’re just going to deal with it and we’ll just raise the prices. … It’s going to be very, very difficult to keep products affordable for Americans.”