Donald Trump’s victory in the recent U.S. presidential election — and the subsequent stock market rally — has many in the mainstream media comparing President-elect Trump’s economic policies to those rolled out in the early years of the Reagan Revolution. Read on and I’ll explain why the odds are stacked against a repeat of economic history and what it means for you and your money.
Yes, Trump’s defeat of Hillary Clinton was seismic in many ways. And the world’s financial markets are still trying to figure out what it all means …
It’s a process which will likely take a while and, in my view, be characterized by sharp moves (20% or more) in BOTH directions (up and down) for the near future.
But for now, the global equity markets see nothing but positives in Trump’s policies and have, in the short term, repriced risk in a way that has sent the U.S. stock market soaring.
Indeed, U.S. equites, as measured by the benchmark S&P 500 index, have risen approximately 6% since Election Day, reaching new highs a number of times over the past month or so.
Obviously, this kind of shift from one side of the boat to the other doesn’t come without turbulence …
On one hand, we have equities surging to record-high valuation levels. But on the other, we see a similar sized decline in the bond market as an increase in interest rates has caused a significant reduction in bond valuations.
This violent see-saw action in the world’s two major asset classes has many everyday investors asking, “What should I do?”
Well, in my opinion, what you don’t do is go piling into the equity market as it hovers around record high levels.
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Recall, it was the iconic investment advisor Warren Buffett who said: “Price is what you pay and value is what you get.” And currently, stock market value has diminished as prices have moved higher.
For now, the right move is to use this market rally as an opportunity to reduce your overall equity exposure. And if you’ve missed the move, don’t jump in now for fear of missing out. Reason: You are likely going to get another chance to buy in at lower levels and better valuations.
Here’s why …
Proponents of President-elect Trump’s policies say his pledge to scale back business regulations on various industries, especially financial services and pharmaceuticals, will provide a big boost to business. What’s more, his supporters say that his vow to increase infrastructure and military spending is an undeniable plus for manufacturers and contractors.
But the big explanation most often given for the post-election stock market rally is that the almost certain business and personal tax-rate cuts that will occur over the next year will ignite economic activity in the same way Ronald Reagan’s tax policies unleashed America’s economic might.
However, at the risk of throwing a wet blanket on the current market euphoria, let’s take a look at a few key differences between then and now:
As this chart shows, Reagan inherited a stock market which was priced at levels that made it hard to lose if you invested in equities (7.4 times earnings in 1980, compared to the current level of 20.3 times earnings). In 1980, the S&P 500 offered a 5.7% dividend yield compared to a current dividend yield of 2.1%. And with inflation running at 12.5% and the 10-year U.S. Treasury rate sitting at 12%, borrowing costs had no place to go but down, causing an extraordinary secular bond market rally never experienced before in modern financial times.
After considering the chart above, even the most optimistic among us would say that Trump and his economic team face some strong head winds. And I haven’t even touched on the BIG macro problem facing the U.S economy which is an avalanche of global debt.
Making things even far more difficult for a Trump administration is that in the last 100 years there has never been a two-term presidency end that wasn’t followed, within 12 months, by a recession.
But we do live in interesting times. And it’s possible that the world’s central banks will make good on their promises to double down on their experimental economic policies in a way that will kick the can down the road on a recession.
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So let’s say that Trump’s policies work. The U.S. economy is still a big ship to steer: It doesn’t just turn on a dime. Large government-funded infrastructure projects take time to get started. Time for the funding to come in. Time for the projects to be planned. And time for the equipment to be delivered.
That’s why sometime in the next several months, I expect the uncertainty factor that the President-elect and his policies bring, to “trump” the recent market euphoria. And in the financial markets, uncertainty equates to volatility.
With increased volatility, I anticipate the current stock market rally to reverse and the recent sell-off in bonds to be temporary. A heightened level of uncertainty should send investors scrambling for safety, specifically to U.S. treasuries.
Look, I’m not Mr. Gloom and Doom. But as a long-term Wall Street veteran and private trustee, I only want to invest the precious investment capital that’s under my care when the odds are with me. I just don’t see the odds on my side in equities. And it’s too early to begin aggressively establishing core intermediate or long-term bond positions.
That means — for now — it’s not time to be filling up your boots with risk. And if you do own equities, make sure they are high quality, dividend paying, highly liquid and have a global distribution platform that can power forward in a slow growth world. And for your bond portfolio, make sure your holdings are high quality too, with a short duration.
Keep an eye out for my future articles in which I’ll reveal and explain the REALLY BIG global macro-factor affecting the financial markets. Plus, I’ll give you my inside scoop on how the world’s central banks’ primary monetary policy is based on a scheme borrowed from a popular, yet dangerous, wagering strategy that professional gamblers have been using for years.
Best wishes,
Bill Hall
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
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US must re-consult with new marketing during Trump ext-mission to ensure that market fit with S&P future
Makes total sense. That’s what I’m doing. Always good to hear from an expert then I’m on the right track. Keep up the great work.
ManEngment Ltd.
Hold on a minute…..are saying the geniuses leading the huge Wall St firms and funds are this naive?…. “That’s why sometime in the next several months, I expect the uncertainty factor that the President-elect and his policies bring, to “trump†the recent market euphoria. And in the financial markets, uncertainty equates to volatility.” You couldn’t possibly have enough little investors like me to create the volume in run up that just occurred since the election.
Great article, Bill. History shows that the market is always cyclical. I believe the Trump effect will last, but there is always the inevitable pullback, offering us a buying opportunity.
Scotty B.
Thanks Bill, very helpful article.
I just got out of college when Reagan was elected and I well remember the huge recession his first two years in office. I wasn’t able to find a job in my field and ended up doing plan B: joining the Army. I did get to enjoy the strong dollar in Europe during the mid-80s, which was nice, and came back home after my tour to a very vibrant economy.
We went from the worlds largest creditor
to the worlds largest debter under Reagan.
Ask Stockman he was the architect of the policy
fo Reagan.
Compelling, drivingly forceful detailed examination of the elements. Bravo.
I believe that Trumponomics will somewhat alleviate the present catastrophic scenario but no one has the magic wand and the catastrophic consequences of eight years of catastrophic administration will eventually ,certainly and again catastrophically come home to roost!
Did I say catastrophic? I would be so exhilarated and happy to be proven WRONG!
Luciano,]
I enjoy saying your name. Are you referring to cause and effect or do you see a black swan ushering in the catastrophe?
Our recession started under Bush.
The worst sense the Great Depression.
And more to come now.
I enjoyed following Bill when he was associated with Money & Markets a couple of years ago. How do I not miss anything that he shares through Money & Markets in the future?
Greetings, and MERRY Christmas Bill, do you, or Plimsoll receive investment capital, do you advise directly like Larry Edelson, are you a stock broker, explain commissions, send broch ures, etc. I appreciate your style of writing, and mostly agree. Please send asap, am planning a major investment move.
Thanks, good insight. Would it be a good time to invest in reversed ETF s, such as TZA for the short term?
Give it a break! The day Trump was elected the false, negative, Right Wing Propoganda News that had been sounding daily since Obama was elected, abruptly stopped.
And with the diappearance of that false crap, the small retail investor has begun returning. This is noted by the increases in volume since the election.
Sadly, those investors are about 8 years too late and are about to get their lunch handed back to them by the carpet bagggers on Wall Street, just like they did in 1929 and 2007.
Let us not forget that Both Stock Market Crashes in the past 100 years, happened when Republicans dominated the Presidency and the Congress.
In my opinion, the truer statement would be “Buyer Beware”!…
Great read. Common sense. This can’t go on nor is it sustainable. The big issue, as always, is timing.
So my questions for you, me, and anyone who lists are:
When do I take my chips off the table and wait out the coming storm? Is the market in front of potential infa structure spending, defense spending, lower tax benefits (higher corporate profits)????
Is it a good time to go short? Ride the downside making money?
Will a Trump tweet set off a trade war?
Is gold a safe haven? Is there anything that is a safe haven anymore?
Dark clouds are certainly on the way. Will they rain recession, inflation, or both?
Or am I just a profit of doom!
FOMO rules the day!
What is next? And when?
I can never remember (in my 74 years) more uncertain and crazy days ahead.
Bill, what’s your take on Gold and Oil?
For a change of pace, read the Economic Policy Institute’s recent article titled “If Trump was really serious about helping workers…..”
Seems imminently sensible especially since RSI on the Dow, the S&P and Russell 2000 are well into overbought territory.
Cash is like a 1911 colt 45 pistol, great to have when you need it, cash is protection for the dark side we don’t see.
Whats the CAC40 in the financial times? is it some sort of Stock Exchange which lists a firms share capital and reserves, you havnt really mentioned the working capital cycle either?
Every president inherits whatever the past administrations has done to kick the can down the road. The Federal Reserve is the reason our country must continue following the Keynes trail to its ultimate end which is total collapse. Trump may get done what Reagan should have but we will still have to suffer the ramifications of the demise of our central bank. Always invest in some things the government doesn’t want or know about.