Has The “Trump Rally” Run Of Out Steam?

Credit: Gage Skidmore

Let’s get a few things straight. Donald Trump has signed a few executive orders. He’s ruffled a lot of feathers and he’s got more than a few people hot under the collar. But he hasn’t exactly done much yet to warrant the support of the market.

He hasn’t fleshed out his plans in dollars and cents. An A4 sheet of paper is hardly fleshing out tax reforms.

He hasn’t put any meat on the bones of his big-picture ideas to revive the US economy. Nevertheless, the market has given him more than the benefit of the doubt.

But now the knives are out. The bears have awoken from their hibernation.

Deafening doom-mongers

The doom-mongers have got their voices back. All that it took for severe cynicism to surface was a few months of strong gains by the Dow Jones Industrial Index. And now the naysayers are saying that it’s time for a correction.

Some are even predicting a crash. They may well be right. But they could just as easily be wrong too. They were wrong about Grexit. They were very wrong about Brexit. What makes them so sure that they are right to call an end to the “Trump Rally”.

It could be the almost relentless rise of the US markets following Trump’s election success in November 2016 that has given traders a touch of vertigo. Actually, some had predicted that the market would fall, if Trump was elected.

But since his election triumph, the US benchmark index has gained around 16%. The remarkable ascent in four months is nearly twice the average gains that investors would normally expect from an entire year of investing.

It is, therefore, understandable why some might be concerned that the market has got ahead of itself.

Lofty promises

There is another reason why some might be worried. Trump has promised to “Make America Great Again“. The lofty promise will have to be fulfilled, if it to mean anything to his loyal followers. But there might be a problem….

……Presidents propose and Congress disposes. So Trump is unlikely to have everything his own way. His budget will have to pass the scrutiny of US lawmakers. There is no guarantee that will happen because his plans are ambitious.

He wants to spend $1 trillion on improving US infrastructure. He wants to increase defence spending. He wants to build a wall along the US-Mexico border. He wants to simplify taxes.

The “wants” could amount to nothing, unless US politicians agree that the Trump budget will not heap more debt onto an already heavily-indebted US.

Fed worry

Trump’s elaborate spending plans are giving the Federal Reserve reasons to worry. It was not that long ago when the market doubted that the Fed would be able to raise interest rates at all this year. But now they reckon that the cost of borrowing could go up three, if not four times this year.

A rate hike could take some of the gloss from shares, especially for income investors. They have been some of the stock market’s staunchest supporters.

In a low interest rate environment, they went in search of high-yielding shares at a time when savings accounts were paying virtually nothing. Their departure could puncture a highly-rated market that could in turn precipitate a mass exodus.

There is also the small matter of Trump’s election mantra, which is to “Put America First“. The implication is that everyone would come second. That could initiate a bitter trade war with some of America’s more important trading partners.

Green shoots

Import tariffs are the last thing that the world needs, just as the green shoots of a global recovery are appearing. It is unclear which countries could be affected. But that has been the hallmark of Donald Trump – confusion, obfuscation and mystification.

But if Trump gets his way, tariffs on imports could stoke inflation, which in turn could trigger even higher US interest rates.

It has to be said that much, if not most of this, is conjecture. They are the types of scenarios that economist love to explore. But economics is not an exact science.

What is likely, though, is years of stock market volatility. But as long-term investors we need to rise above the noise. That, however, will not be easy unless we have a very clear idea about the stocks that we want to own.

Value matters

Every company has an intrinsic value. It could be the book value. It could the discounted cash flow. It could be the sum-of-the-parts

The upshot is that to be able to value a business, then its future must be predictable. That should be basis of all investing. Warren Buffett once said: “Price is what you pay – Value is what you get.” 

So, our job as investors is to decide whether an investment will be more valuable in a decade’s time. If it is, then any time can be a good time to invest – Trump or no Trump.

A version of this article first appeared in the Straits Times.

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