As investors mull over how to play the market following the U.S. election result, Sanders Morris’ George Bull reveals what he is looking out for right now. “The postelection rally was frenetic and may have been too much too soon. But, it did show that investors have confidence that the business community and earnings will be strong under a [Donald] Trump administration,” the chairman at the U.S.-headquartered wealth management firm told CNBC’s “Street Signs Asia” on Wednesday. However, he warned that there was “schizophrenia” in the bond market, which could “fuel indecision and some correction” in the stock markets. Stocks are often rattled when Treasury yields surge, particularly growth stocks as higher yields can hurt their expected future earnings. “There is a great deal of fear that the tax situation in the United States will refuel inflation. So investors are sort of caught, on the one hand, saying, these [bond] yields are quite attractive, let’s buy them. On the other hand, they think, my goodness, if the deficit goes untrammeled into the $2 trillion a year area, the bond vigilantes … will take over once again,” he noted, referencing an expected rising of fiscal deficits under the new administration, which could lead to higher government borrowing and thus higher yields. The term “bond vigilantes” refers to a situation where fixed income traders eschew government debt or sell it, which forces yields higher. President-elect Donald Trump previously vowed to make tax cuts such as in social security and corporate income taxes, leading many to predict that U.S. borrowing will increase as tax receipts fall. The Nasdaq Composite , the S & P 500 and the Dow Jones Industrial Average took a breather midweek from their post U.S. election run and the Federal Reserve’s additional 25 basis point rate cut last week. The benchmark 10-year Treasury yield , meanwhile, is hovering around 4.47%. Looking ahead, Bull believes the “euphoria of the moment will fade.” “The threat of the bond vigilantes will subdue the animal spirits, tho[ugh] not conquer them. At some point, the fixed income markets will determine what is fiscally irresponsible, trumping (pun) the Fed,” he said in research notes to CNBC. The wealth manager expects rates on the 10-year U.S. Treasury to reach 5% before the end of the year. Such a phenomenon, he said, will be both an “opportunity to lock in high yields and a signal to the new Trump administration and Congress that budgets count.” “That’s a plus to income seekers-especially retirees and seniors,” he said. Touching upon Trump’s tax cuts, Bull noted that the president-elect is likely to hold taxes down like he did in his first tenure. However, he foresees the imposition of new taxes “in obfuscated ways,” such as a major minimum tax on corporate earnings and limits on deductions. Market plays Against this backdrop, the wealth manager is playing the market with “companies who pay taxes on all of their income, not just income after deductions and shelters.” The energy sector is one he is looking at given Trump’s motive to fight inflation by reducing energy costs. Names he is betting on include “well-positioned” companies like Enterprise Product Partners and Energy Transfer with strong annual dividend yields of 6.88% and 7.58% respectively. The banking sector is another one Bull likes, describing community and regional U.S. banks as “attractive.” “They have been on a few days’ tear, but still far below their prior prices. With an economy that is apt to be strong coupled with more reasonable regulation, they deserve attention,” he said, naming the Texas-headquartered Veritex Holdings as an example of a “well managed, growing [and] conservatively capitalized” company he likes.
