I ended Part 1 of this series noting that the rhetoric in Donald Trump's campaign indicates that, if elected, he will attempt to reduce the defense budget and reallocate fiscal spending to programs designed to create U.S. jobs.
In his victory speech after winning the New Hampshire Republican primary he vowed to be ''the greatest jobs President that God ever created.'' Although we don't know the specifics of how he plans on doing that, it is logical that it would be similar to what was announced by President Obama in his 2013 State of the Union Address in 2014, wherein he proposed shrinking the national defense budget and reallocating the savings into domestic infrastructure programs.
The intention was to create jobs by government fiat, through the private sector by means of government contracts, or both.
Although there is near universal agreement among economists that government spending on infrastructure produces a much greater positive fiscal multiplier than any other kind of spending, including defense, it has proven impossible to get Congress to go along with the executive branch on such a shift in national priorities. I discussed this in the column, "State of the Union Speech Falls Flat."
The primary reason for this is the grip the defense industry has been able to maintain over federal budget allocation since the end of World War II, which was greatly extended following the implementation of the senior executive service (SES) level of federal government employment in 1979. As a result, presidents since WW2 have focused domestic spending programs on areas where the probabilities of political success were higher; namely the expansion of social welfare programs, affordable housing and mortgage efforts, and access to health care.
For a potential Trump Administration to be successful at directly creating jobs and for jobs to be created by the private sector, a domestic infrastructure spending program will almost certainly be required, one that will by necessity require a reallocation of the fiscal budget from defense spending.
The probability of this occurring will settle in with institutional owners of the largest government contractors as well as the leaders and managers of them if Trump continues to advance in the polls.
It is possible that instead of attempting to fight a Trump administration on the reallocation of defense dollars to domestic programs that the large government contractors will move to expand their capacity to perform in the domestic infrastructure space. However, that will still involve moving from a known status quo to a new and unknown future and investors will almost certainly respond by reducing their holdings of the stocks of government contractors as the risk level in them increases.
But the real opportunity for investors will come from the infrastructure companies, which I last discussed in the column, "When Infrastructure Goes Private," about a year and a half ago.
Since Obama's infrastructure program failed to get funded and China's growth has slowed, many of these stocks have been brutalized. The three with the greatest upside potential in the event of a Trump election are, Jacobs Engineering Group (JEC), Fluor (FLR), and Chicago Bridge & Iron (CBI).
These are all very large companies, with roughly 40,000-50,000 employees. They will all be lead contractors if a national infrastructure program is enacted to rebuild bridges, roads, airports, etc.
Their stocks are currently selling for multi-year lows, though. Jacobs is at its lowest level since the middle of 2012, Flour since the 2008-2009 crisis, and CBI since the 2011 selloff. They all have negative returns for the past five years, and Jacobs and Flour are negative for the past 10.
I'm not advising taking any positions in these securities yet, or the rest of the infrastructure space, but investors should put these names on a watch list, while also listening to what Trump and the other candidates say as they define their platforms in the run-up to the party nominations and national election.