President Trump & The Markets

On Wednesday we discussed how overreacting to headline risk often can be dangerous to your portfolio.  As of this writing the S&P 500 is about a percent higher than where it was at its lows on Wednesday as the potential impeachment of the President geared up.  So far the markets have seemingly shrugged off this news, likely on the assumption that based on what's been release so far there's not enough out there for an impeachment trial to pass muster in the Senate.  That of course may change in the coming days.  We have not seen the last of this drama.  However, our point then was to wait for the news to come out and see how markets reacted.  Doing so, even if you decide today to sell, would have likely saved you some money.

I am often asked why the economy and markets have done well under President Trump.  The reason for this is that whether you like them or not the President's policies have been seen as market friendly.  However, when reviewing all of this a more nuanced picture begins to emerge.  It is true that this Administration has seemed to have been singularly focused on creating jobs and growing the economy.  We have the lowest unemployment in two generations and GDP growth will likely come in around 2% for this year.  If that's the case then we'll have likely averaged around 2.75% for the first three years of the President's term.  That's lower than the Administration has touted over the years but better than the Obama averages.  The President passed a comprehensive rewrite of the US tax laws and lowered taxes for millions and not just the rich.  In the process though we have added billions to the Federal budget deficit and only time will tell how that will play out.  Also the economy has run into significant headwinds this year, most notably on trade related issues and these will not be going away as the calendar ticks into 2020.

In terms of the stock market, the S&P 500 is currently up about 40% since the President was elected back in 2016, excluding dividends.  Most of that gain came between his election and late January 2018.  Since that time the S&P 500 is up slightly under 4%.  We also experienced a 20% correction in the last quarter of 2018.  

Given the economic, interest rate and fundamental backdrop it is probably correct to say that stocks are currently fairly valued in 2019, although there is probably still potential for some gains as we head into the last quarter of this year which will start Tuesday.  We are at a point in time where earnings expectations flip over into 2020 and by the end of this year we'll start looking out at 2021.  Right now expectations are for corporate earnings to recover in 2020 with profit growth for the S&P 500 in the 10-12% range.  Wall Street analysts are traditionally optimistic about earnings out that far so it's likely that will be paired back as 2020 progresses.  Still if we have 6-8% earnings growth then we think the potential is there for stock advancement in the 6-8% range next year.  Throwing in a nearly 2% dividend yield for the S&P 500 and you see total return potential that could be around 10% next year if certain things pan out.

Of course there are things that could limit that advance and there is a higher probability that the gains next year will be front loaded into the 1st six months of 2020 as Wall Street focuses on the Presidential elections next year.  I believe the President faces a significant headwind to reelection next year and his likelihood of being given another four years will depend on who the Democrats nominate as their candidate.  A centrist candidate would decrease Mr. Trumps reelection chances while a candidate in the Bernie Sanders, Elizabeth Warren wing of the party would likely raise the odds of Mr. Trump being retained.  One thing is that it is unlikely that a Sanders/Warren candidacy would be viewed positively by the Wall Street community and there is a significant possibility of market headwinds should it look like that wing of the party advances.  But that's far in the future and let's see how the Democratic primaries play out next spring.

Finally in terms of the markets I would note a fact that I have pointed out repeatedly in the past ten years about the relationship of dividends and treasury yields.  Right now the current yield on the S&P 500 is just slightly under 2%.  Furthermore the dividends that make up that index will likely compound at a 2-5% clip over time.  The current rate on the US 30-year treasury yield is 2.15%. The 10-year rate is 1.65%.  If you invest today in a 10 or 30-year bond you are saying that you have so little confidence in American growth during those time periods that you're willing to accept a rate of return that is unlikely to beat the real rate of inflation over these years.  Equities or equity related investments will be volatile but I think a I'll take the bet that their rate of return will be bonds hands down over a 10-30-year period going forward.  We'll see and hopefully I'll be around in 30 years to see if I've won that wager!

Also on a bit of a side note I will be leaving over the weekend to deal with a family matter that may have me out of touch for parts of next week in terms of this blog.  I don't expect to post much here until maybe Wednesday, but it could extend out farther than that.   I will do an update if my absence needs to be longer.

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.