The burning questions of our time–Is the “Trump Bump” about to end? ” “Do you think it’s a bit long-in-the-tooth?” “Are you worried?” I answer in two ways.
Although there is no question the surprise election of Donald J. Trump (and its corollary– the defeat of his business-unfriendly Democratic opponent) was absolutely responsible for a significant jump in stock prices, I’m not certain how much of the ensuing rally in the market can be attributed to the President. Yes, it was the beginning of a new chapter in the history of unbridled, free-market capitalism with regulatory shackles being whisked away at the stroke of an executive-order pen or the confirmation of any new pro-business, laissez-faire cabinet member. As we’ve seen this would be the easy part.
Tax reform, infrastructure spending and healthcare reform are not easy. These require policy chops and focus that the new administration may not have gotten its arms around just yet. How soon, if ever, this needed competency may surface is anybody’s guess. It’s obviously not there now. Certainly, by now, the street has picked up on this potential to disappoint the bulls. Yet the market seems to have shrugged this off and continues to rise.
Why? Despite the fact that both houses of Congress and the Presidency are in the hands of the Republican Party, it would appear intra-party conflict and uncertainty regarding policy may result in continuing gridlock. Of course, everybody knows, gridlock is good. Gridlock means they (The Congress) can’t do anything to hurt us. Oh yes, we mustn’t forget, despite many protestations to the contrary, the economy appears to be growing and was growing BT (Before Trump) with low interest rates and moderate inflation.
Barron’s, last week, gave us a full course in what might slip between the cup and the lip-“The Trump Market: is this as good as it gets?” (you need a Wall Street Journal subscription to view).
On Thursday February 16, the President declared he had inherited “a real mess.” The article above, quoting Doug Ramsey, CIO at Leuthold Group, concurs (tongue in cheek).
“By these criteria, President Donald Trump hardly seems to have inherited a “mess,” as he asserted in his extraordinary press conference on Thursday. Rather, things are “too good” for his sake, according to Doug Ramsey, the Leuthold Group’s chief investment officer: “a nearly full-employment economy, inflated market valuations, and relatively high corporate profit margins. While there are mitigating factors in the short run that have kept us bullish, our expectations on a four-year horizon are restrained by these initial conditions,” he continues. “Trump should be restrained, too.”
In contrast, it was Barack Obama’s good fortune to come to office in the midst of a real mess: the worst downturn since the Great Depression and a jobless rate near 10%. Equity valuations also were depressed, with the S&P 500 index trading in January 2009 at 11.4 times normalized earnings.”
Seems to me at this point all we need to do is make sure all in the administration take the Hippocratic Oath, “First do no harm.”
BTW, it is not only the U.S. economy that continues to grow, it would appear most of the world is on that path with corporate earnings moving on the same track —
Abroad, concerns about “Nexit,” “Frexit,” and “Grexit” surface ahead of elections in Netherlands, France, and possibly in Greece. Still, David Kelly, chief global strategist at J.P. Morgan Asset Management, thinks that European stocks deserve consideration: Price/earnings valuation near 15 times is just 3% above the 25-year average, and while profit growth of 11% in 2017 looks hopeful, the average dividend yield in the MSCI Europe Index is 3.6%, versus 2% for the S&P 500.
Also, “the euro zone is still earlier in its economic expansion than the U.S.,” Kelly writes. Unemployment peaked there at 12.1% only in mid-2013, and while it is now near 9.6%, room for unemployment to fall further can still fuel growth for years to come. (Excerpted from this week’s Streetwise column in Barron’s — Eight Years a Bull-you need a subscription)
As you can see in Numero Uno, there is more to this move to new highs than the “Trump Bump.”
Having made the case there maybe more than meets the eye in the move since the election, it might be useful for me to address the “long-in the-tooth” question. In this context we should contemplate the entire duration of this secular bull market, the past eight years. Importantly, since the market first moved off the March 2009 lows the talking heads and pundits have questioned its integrity all the way up. I cannot begin to quote the plethora of expert opinion and reasons why the market should not trade above 1000 on the S&P in 2009 or 1550 (the previous all-time-high) in 2013 or 2000 in 2014 (closing at 2367, Friday February 2017).
Bull markets typically do not die of old age, but they do die. Secular bull markets, such as the one we are in, die, usually in a in a long burst of euphoria with the public all in. We are nowhere near that place yet. As we trade at new all-time highs, the just-released February 23, survey of of investor sentiment from the American Associate of Individual Investors shows bullish sentiment at only 38.46%–hardly euphoric.
This does not preclude sharp, scary (as we experienced in the 1982-2000 secular bull–1987) and significant cracks in prices. These are normal, to be expected but very hard to predict. Many have fallen on their swords predicting the end of this one. Youtube and the video vaults at CNBC are full of examples. Check eight years of Nouriel Roubini, Jim Rodgers, Marc Faber, Jim Chanos and a host of others.
So, are we headed for a Trump Dump? Probably so. It would be normal. I can comfortably predict that as he has taken credit for the Bump he will not take credit for the Dump. If it adds to your comfort, take a few chips off the table. I still believe on a longer-term basis we have significantly further to go.
Finally, am I worried about the market? No. What worries me is the political environment in the U.S., but you cannot let that color your investment posture (see–“The Hidden Killer– …”). Sure, you hate it when your portfolio declines in a bad market, but it is a normal event, a part of being an investor. Worrying about it is wasted time, mental energy that could be better spent finding good companies in which to invest.
What’s your take?
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2 thoughts on ““Trump Bump” on the way to a Trump Dump?”
Thanks Bill, attached find some commentary from a writer that I follow. I am a real dinosaur but I am banging the drum on Silver. The world wide sovereign debt crisis is my biggest data point and that will only get worse and accelerate. I have spent quite a bit of time from my institutional path working in that space. I hope all is well. I enjoy your posts.
Buzz, thank you for your comment and your readership. I took a look at the link that you provided and believe that I do not share the same dark view of what is going on monetarily as the author(I.e. Fed monetary policy destroying the dollar). I can agree that money printing is a bad thing. It seems to be going on in central banks all over the world. This combined with hordes of new consumers coming into the marketplace in Asia should eventually equal inflation. And, there will be an opportunity to trade gold and precious metals. I’m just not certain that I want to be a long-term investor in the stuff based on the history of the commodity over the past 47 years.
As it pertains to the “worldwide sovereign debt crisis,” there are a lot of people in the United States that believe very strongly we are in the midst of one. I’m not certain I agree with that.
I view my personal income to be like gross national product. When I purchased my first house, using credit, I borrowed what was then four times my annual income to purchase the house (The equivalent of 400% of my gross national product). The United States is levered one to one right now. Am I comfortable with it? I’m not sure. But considering the facts we owe most of this money to Ourselves and the country is rich in assets, I sleep pretty well at night.
There are a couple of things that printing money does as an inflation creating engine. It makes the cost of our debt easier to repay in cheaper dollars and inflation gives corporate and labor enterprises the opportunity to raise prices … something that globalization has stifled over the past couple of decades. Historically, common stocks have been viewed as an inflation hedge, with the value of their physical (depreciated) plant increasing due to higher replacement costs and earnings increasing in part because of the ability to get price increases.
One thing that I am absolutely certain of is that the current secular bull market in stocks will end badly. They always do. Money printing/inflation May be what brings it down. In the meantime I find it very difficult to be in bonds or gold and very compelling to stay in the equity market, Especially since it continues to be so unloved. This is the Second secular bull market I have been involved in in my career. It is a mirror image of what happened coming off the bottom in 1974 ( Low interest rates versus high interest rates in 1974 and low inflation versus runaway inflation) and the breakout we had to new all-time highs in 1982. Ergo, right now I believe that equities would appear to be the proper place to be even though we may be setting up for a significant correction. As I said in my post, I believe this market has much further to go.
Call me if you’d like to chat further.
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