In the early morning hours of Election Night, as it was becoming more and more apparent that Donald Trump would win, the Dow Jones “Futures” indicated that the Index would open by Down more than 500 points. As it turned out, on the day following the Election, the Dow closed Up by 257 points. And since then, it has rallied to gain 8.87%, or 71% on an annualized basis. But why?
Various investors have justified the rally as being: politically motivated; Trump’s business savvy; stock buy-backs; and his vow to repeal most regulations. Consider, however, that: politics is irrelevant in investing; Trump’s business savvy is mostly based on Daddy’s inherited checkbook, and his insincere sales pitch; corporations buy stock back when they don’t see room for growth in their existing business lines; and which regulations: would he terminate? The ones that attempt to protect us from gun-whackos; those that impose clean air and water standards; or will he repeal the Dodd-Frank Act which reined-in banks, as promised, thus freeing them to take America back to 2008?
A bubble is created when assets are trading at astronomical prices, far above their true value. For instance, tulip bulbs were all the rage in seventeenth century Holland, as prices increased, over and over again, every time the bulbs changed hands. And leading-up to 2007, banks saw profits in mortgages: offering them to people who would be unable to ever repay them; hiding the true costs with abnormally low “teaser” rates for the first few years; and then, the banks sold the “sub-prime” mortgages to be bundled into dishonestly AAA-rated mortgage-backed bonds,
Whenever a change of Administration occurs, there is a certain amount of uncertainty. Who will the new President nominate as his Treasury Secretary? What will his future Fiscal Policies be? Will the new Financial Team—Fed and Treasury—be able to work well together? And will the in-coming President recognize the independence of the Fed, or attempt to impose his own agenda into Monetary Policy?
Yale University Professor Robert Shiller won the Nobel Prize in Economics, in 2013, for his empirical analysis of asset prices. Based on his research, Shiller concluded that the market is inefficient. He goes on to suggest that a good bit of the current market rally, which has ensued following Donald Trump’s victory, can be attributed to “Psychology”. Professor Shiller goes on to compare the current market euphoria to the prosperity America enjoyed during the Coolidge Era—the Roaring 20s—which ended in 1929, and led to the decade-long Great Depression of the 1930s.
I have recently written that I have similar reservations about Donald Trump, and what his Administration might bring. Based on that outlook, I have made major changes to our investment portfolio. And just think: here we are, still one full month before Trump takes Office, and he is already making noise, controlling the media and cozying-up to our enemies. I hate to even think of what he might say or do next!