Where Do Assets Go From Here?
On March 1, 2017, the Dow closed at a ridiculous, wing-melting 21,115.55, an all-time high. In fact, if we go back from there to November 8, 2016, the last day when it seemed Hillary Clinton was likely to become our 45th President, the Dow was up more than 15 percent.
In the 40-some days since setting the record, the Dow is back to the merely lunar mid-20,000 range, a respectable 12 percent(ish) point-to-point gain from November 8.
Alright, let’s conduct a little thought experiment. It’s March 2009 – you’re at home watching CNBC, reading the ticker as it rolls across the bottom of the screen, wishing you bought treasuries or managed futures last summer. Feeling dejected, you stumble to the fridge for a beer. You pull the door open and discover, sadly, that you drank the last beer for breakfast an hour ago. Suddenly, you remember there’s vodka in the freezer. You yank it open and find, to your dismay, that the freezer contains a live cougar who is very upset with you. The incident with the cougar goes poorly and you’re kept in a medically-induced coma until March 1, 2017.
When you wake up, your doctor cheerfully tells you that Donald Trump is the President (oh right, don’t forget he won by promising to start a trade war with Mexico and China) and that equities have literally never been higher. She’s heard that you were some kind of financial person or a master of business whatnot before the whole thing with the cougar, and she’d like some advice on how to invest her 403b savings.
What do you say?
“Put me back under” is not an option.
Honestly, what’s your gut reaction there?
I know what mine is, and I was only in a coma for like… a quarter of that stretch. I’m gonna stand up and scream “DEAR GOD SELL EVERYTHING” at the top of my lungs.
But here we are. It’s not a thought experiment. It’s real life. People far more intelligent than I have already weighed in here, and in general, consensus seems to be “chill out, bro.” Paul Krugman, blogging for the Times on February 7, wrote “…when you actually look at the data, the market action has been much smaller than the hype.” Concluding the same piece, he noted, “…the case for either a huge Trump effect or a huge Trump bubble is a lot weaker than you might think.”
On the other hand, just over two weeks later, Ben White and Mary Lee wrote in Politico that “The S&P now trades at about 27 times earnings, above its long-term average of about 16… the highest level since June 2004. The S&P is now 9 percent higher than its 200-day average, often a signal that a correction is ahead.”
This past Friday, the S&P closed at 24.45 times earnings for the trailing 12 months. If we use forward P/E instead of trailing, the Journal has us sitting at 18.25 times as of Friday, which, again, is higher than anything we’ve seen since 2004 (the denominator in one is an estimate, whereas the other one uses actual reported earnings, hence the difference between the figures).
OK, so what does that mean? About the only thing we can say is that stocks are “expensive” from a historical perspective, but it doesn’t mean we’re at the edge of a cliff either. When you look at individual sector performance, you see that financials, industrials, telecoms, and, to some extent, energy, are driving the post-election boom. You know… the “old” economy. Why?
Well, Don hired everybody at Goldman to run the Treasury. Ajit Pai is running the FCC. Scott Pruitt has the top job at the EPA. And then there was Steve Bannon promising to “deconstruct the administrative state.”
So in broad strokes, the whole “climate of deregulation” thing seems to have benefitted those with whom HRC would hypothetically have clashed.
In spite of all that, we’re a month and a half off the March 1 high. Interest rates are still rising, albeit slowly, and a quieter optimism about the state of the economy seems to have taken hold. Warren Buffett, perhaps the most famous living contrarian investor, is long $12 billion more in 2017 than he was in 2016 (according to CNBC). The FOMC, though not convened to shepherd equity markets, indicated after its March meeting that, “Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies, but that near-term risks to the economic outlook appeared roughly balanced.”
Alright, the tilt here is… what? I don’t know which direction equities are going, and you probably don’t either (if you do, hit me up on LinkedIn). Maybe at the end of the day, the “Trump Bump” is simply an object lesson in humility – that the broad strokes of the economy are much, much bigger than the Presidency. Had Hillary swung Pennsylvania, Ohio, and Michigan back in November, the Dow would probably still be sitting at 20,000 and change.
Before I came to business school, I spent about 6 years moving money around by one method or another. Our investment team spent a lot of time searching for and responding to unpriced risk – so much so that we likely left a lot of money on the table.
I’m probably doing the exact same thing with Trump – searching and apologizing for unpriced risk. And even though the idea of an “exogenous shock” feels much more likely with Don at the helm, the 87th day of his Presidency looks a wee bit more conventional than I thought it might (see: Ex-Im Bank, comments on Janet Yellen, general chumminess with Xi Jinping, etc.). Where it goes from here… who knows?
“Cautious optimism” is the phrase of the day.