Since Donald Trump was elected in early November, the US stock market has surged to new heights. We have fielded dozens of phone calls from clients asking how we are viewing this situation. Below is a summary of our thoughts:
- We believe this a tortoise vs hare race in terms of investing. Lots of investors are piling into the market right now as they don’t want to miss this surge. Or they are seeing unbelievable opportunities. Caution is being replaced by exuberance for some investors. This is the first time since the recession of 2008 and 2009, that we are hearing investors feel confident and optimistic in the markets. This kind of knee-jerk reaction reminds me of the story about the tortoise and the hare, where the hare is overly confident in his abilities while the tortoise remains steady and purposefully in his pursuit. In this case, we will gladly be the tortoise. We will continue our steadfast approach to investing and will not deviate from our process.
- What’s changed since trump’s election: Trump has continued to tweet his positions and that has been well received by the market. No policies have been actually implemented, yet the market is pricing itself as though the policies have been implemented. We all know intuitively that a president can’t just snap his fingers to make things happen. As Trump hits resistance in implementing his plans, we expect the stock market to overreact to the bad news. We expect more volatility this year as the market tries to correctly price itself based on the actions and words (and tweets) from an unconventional, and unpredictable leader.
- Foreign Opportunities: As measured by valuations, the US stock market is expensive to invest in right now. But when we look oversees, we see stocks on sale. When the 2008 and 2009 recession occurred, the US stock market came back and has reached new highs, but many of the foreign markets have continued to muddle along over the last few years. One related item is how the dollar will do relative to other currencies – if the dollar continues to strengthen, it could mute any returns we see abroad.
- Small Cap Opportunities: As the US and other countries embrace a more nationalistic attitude, foreign trade will likely be affected. This means, that large US companies that see a significant profit coming from overseas trading will likely be hurt thanks to tariffs. On the flip side, smaller US companies that serve mostly customers in the US will likely do better since they will not have to compete as much with foreign companies (bc there goods would be slapped with tariffs coming into the US).
Bottom line: While we do see some opportunities, we plan to maintain a defensive approach to investing. We see the current run up in stock prices to be unwarranted and that there will be a reversion to the mean at some point. The opposite is true when looking abroad – the foreign markets have limped along for too long and we expect a reversion to the mean to occur at some point.