A Word from Jeff: Market New Deal? Playing the Trump Card

While nearly everyone who can has had time to get used to the idea, it goes without saying that The Donald’s election to the presidency was a sea-change shocker singular in recent memory, an off-the-Richter-scale tumbler that’s sent a tsunami of change across virtually everything that matters in the political, economic, and financial worlds.

However you may feel about this, there is no denying that that markets are moved, and moving. The gush of animal spirits springing from the election have driven a ancient bull market to frenzied new highs, with prognosticators far and wide forecasting blue skies ahead, far as the eye can see. And well they might. In a flash, a finally-healed economy’s got a shot of steroids, enough simulative medicine to really start to rock. Consider:  tax rates are virtually certain to come down, freeing billions for consumers to spend and companies to invest in new growth. One effect should be for US companies to bring many billions in offshore profits back home, once the tax on them is reset to more palatable levels, driving investments in the US economy. Tonic two is the promise for sharply reduced regulation, sure to grease the skids of commerce and growth. Add the magic elixir of fiscal stimulus – the promised massive investment in infrastructure like roads and airports, the military, and even, by gosh, maybe even a wall, and the news tips to almost too good to be true. But not quite, for the market – and even this humble commentator – believe all this to be quite true, and good for the economy and the stock market.

Of course, things don’t go straight up, and neither will this rally. The market is still rather pricey at a trailing P/E for the SP 500 of pushing 25, meaning stocks are trading at about 25 times last year’s profits, which is no great bargain level. While the Trump factors should drive corporate earnings higher and P/E’s lower, I do think the market’s overdue for a pause. Investors and the media have gotten a bit too giddy about the record highs made and new highs to come, never a good sign. Interest rates are clearly rising, often a headwind for stocks. Another concern is that the markets are operating under the assumption that the full package of campaign promises will be implemented, which is far from certain as practical matters, like crises, time constraints, special interests, world events, and Congressional opposition will likely intervene. Remember the market tends to overreact to both positive and negative forces, temporarily overshooting in both directions, then correcting as reality sinks in. As Barron’s aptly put this point in the age of The Donald, “nothing has changed yet.”  My hunch is we will see a sharp correction come January; as investors take profits in anticipation of lower capital gains tax rates effective for 2017. For those with cash to invest, my counsel is to keep your powder dry a bit longer – I think we will see much better prices soon and better buying opportunities just around the corner.

And yes I do think it is worth buying into this new bull.  The Trump card indeed represents a brand new deal for investors, and I think this will propel the current bull market – already one of the longest in history – up for much longer than even I had predicted back in 2009, when I was a pretty lonesome bull. For now, the long term view has turned truly sunny, far as these old eyes can see. My predictions are for a powerful worldwide bull market lasting at least several years, led by the reinvigorated US stock markets. Interest rates will begin rising relatively quickly in the US, driving inflation. So if you need to borrow or refinance, do it soon, and lock in fixed rates! Because US rates will rise faster than those in other countries, the dollar will continue to soar, making non-US stocks even more of a bargain. Above all, brace yourselves for some bumps in market values, and try to not look at stock prices every day, or even every month. Doing so tends to ring investors’ emotional bells in bad ways, and prompt decisions that work against their interests. Instead, remember the benefits of broad diversification, such as is used in the Camarda AIMS+™ portfolios, now fortified by DFA funds. These programs rely on Nobel-prize winning theories that predict higher long term returns with less risk of loss. No, they don’t beat “the market” every year, but remember indices like the S&P 500 are in reality only a tiny piece of the actual total stock market, and that other pieces frequently beat it! Instead, diversification is intended to get you where you need to go, with less stress, risk, and potential damage. But for it to work for you, you have to let it, and that means not obsess about short term fluctuations that can induce knee-jerk reactions and bad decisions. When you look at long term stock charts, such swings – up or down – are revealed for the noise in the gentle upward trend that they really are.  Don’t dwell on the noise! Try to take this view, as I do with my own money. You should sleep better, and probably be richer in the end!

Happy and blessed holidays to each of you, and peaceful and prosperous new year!

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