Deplora-Bull Market

The big story internationally was the surprise election of Donald Trump on November 8th. This prompted an immediate rally in US markets; unfortunately, this also had a negative effect on international investments to close the end of the year and took a fair amount of our profits off the board, at least in the short-term. Despite US fundamentals pointing to valuations being over extended (Mr. Trump himself called the market “a bubble” during his campaign), day after day markets were pushed to new heights. The narrow Dow Jones Industrial Average hit new, record highs 17 times since the election!

While there was virtually no market-shaking economic or corporate data reported at all, “sentiment” surveys fueled the euphoria, surpassing estimates to the upside 80% of the time. When even the cable news cheerleaders could not come up with a rational explanation, it was attributed to “animal spirits.”

The term was first coined by economist John Maynard Keynes in 1936 to describe the emotions that influence consumer confidence. Otherwise, they would have to explain why it makes no sense at all for a company like U.S. Steel to be up over 70% in a matter of weeks. Caterpillar was up 8% Nov. 9, for the day after the election!

Most new presidents enjoy a bit of a honeymoon period. The belief here was that the promised commitment to infrastructure spending and both individual and corporate tax cuts would fuel future profits. After the first eight consecutive years in modern history to never have had a single year of at least 3% growth in GDP, people can be excused for being excited at the prospect of a new leader with a new message, however unconventional. However, inflated valuations currently assume a 30% increase in profits; to date, not even the giddiest first class passenger aboard the “Trump Train” is predicting this. When Mr. Market realizes this, there could be a reckoning here at home.

We agree that our infrastructure needs to be repaired and expanded, but there is no guarantee of a direct correlation to a booming economy; certainly not immediately. Dwight D. Eisenhower is remembered as the president who directed one of the largest infrastructure build-out projects in US history, “The Federal-Aid Highway Act.” From its passage in 1956 until he left office just over four years later in 1961, the US economy saw two recessions. More recently, the $860 billion 2009 “shovel ready” infrastructure stimulus package of Barack Obama is estimated to have added 0.6% to GDP growth for all of 2009. Supply side economics may work, but it takes time.

Another headwind that President Trump will face is not related to his economic policy, but more importantly to Federal Reserve policy. Ronald Reagan is generally credited for a 16 year bull market, the “Reagan Recovery.” Often forgotten is that there was a recession and a market turndown to mark his first two years in office, and a 25% bear market. Neither Ike nor Reagan was saddled with massive level of government debt that Trump has inherited. It is a generally economic principal that spending initiatives and the dollar-multiplier effect diminish greatly at higher levels of debt.

The common thread from Ike to Reagan and now Trump (there are several other examples in between) is that each faced periods of the Fed in tightening mode (both Eisenhower recessions); Reagan’s policies didn’t begin to take root until the Fed became much more accommodating to “Reaganomics.” Does anyone think Janet Yellen may be interested in helping Donald Trump look good for the 2018 mid-term elections?