CPA Gone Mad Issue 7: January 16, 2017
President-Elect Trump Takes Office Friday. What Does This Mean for the Stock Market?
I read the Wall Street Journal in the mornings. I watch CNBC while I’m getting ready for work. And I read independent financial newsletters during lunch, after work, and on the weekends. Much of the information I read and hear about the effect of Trump’s presidency on the stock market is contradictory.
With the new president taking office this week, I want to address all the noise about how his policies will affect the stock market. Last week I shared how all we’ve ever known is a rising bond market and that this 30-year trend could reverse, and how this could infiltrate the stock market and cause it to crash.
This week I want to address the contradictory-sounding information about what the stock market itself will do.
The Huge Contradiction….Is Not a Contradiction, It’s Timing
I keep telling you a stock market crash is coming while also telling you the market is going to rise in the short term. I’m afraid this may sound confusing and like I’m not clear on what’s going to happen. To be clear, I don’t know exactly what’s going to happen or when. I’m only observing where we are and preparing you to maximize long-term wealth building.
I received this question after last week’s newsletter: “How do you think about the net impact on corporate profits assuming increased borrowing costs and savings resulting from deregulation?” Basically I interpreted the question as, I get what you’re saying about a reverse in the 30-year trend of lower interest rates causing higher borrowing costs, but won’t deregulation and lower taxes offset those impacts?
The last time I’ve found it so challenging to present a simple explanation as to why something that seems contradictory is actually not, was in early 2016 as I was planning my book. I was struggling to understand the implications of the next financial crisis on real estate prices. With rising inflation, real estate should go up. But with a tightening of the credit cycle (limited access to borrowed money), real estate should go down.
How did I end up resolving the apparent contradiction in what I believed would happen with real estate? I remembered that it’s not contradiction, it’s all timing.
Well, that’s how we’re going to address the apparent stock market contradiction. By understanding it’s all timing and by removing the timing barrier, you can remove the contradictory noise.
Before getting into that, let me share my immediate reactionary response to the question I received. I’ll then break down this response into the “timing factor” and conclude why removing the timing issue (which we can due to our age and time until retirement) makes it a non-issue.
If tax rates go down, there is a tax holiday on bringing foreign cash home, and any infrastructure spending gets passed the market will go up. And deregulation should send the market up.
But none of this will actually improve the economy. It’s all short-term noise of “kicking the can down the road.” How long it will last is anybody’s best guess but I believe it’s not going to last as long as it has in the past because of how much debt we already have.
And ultimately rising interest rates on all this debt with none of the noise actually improving the economy (and the economy actually worsening from rising interest rates due to pressures of a stronger dollar) will cause the market to finally correct.
Timing Bucket #1: Very Short Term
In the very short term, the market may pull back from the “Trump Rally.” This may already be occurring. I’ve mentioned before that on the night of the election, once it started looking like Trump would win, fear set in. Stock market futures tanked and gold futures soared. But you may not have even noticed this.
By Wednesday morning, the day after the election, this trend completely reversed. The stock market ended Wednesday higher and gold ended lower. Why?
Markets hate uncertainty and are very reactionary. The “experts” and polls assumed Clinton would win. When the opposite became a reality, it created fear and uncertainty, causing markets to drop and gold to rise.
Then Trump gave his speech after Clinton conceded. Investors began getting excited about the prospects of lower taxes, infrastructure spending, and deregulation—translation: continuation of the easy money policies of the last eight years and higher corporate earnings due to lower taxes and lower costs with reduced regulation.
This drove the rise in the market from Election Day until today, where the Dow Jones Industrial Average is at all-time highs and almost ready to break above 20,000 (which I wrote about on LinkedIn as being a meaningless, arbitrary number).
The markets may have gotten ahead of themselves, though. And even though I expect a rise in the near term, there could be a very short-term pullback. Markets rarely go up in a straight line. They have pullbacks as they move up over time.
Investors forget that President-elect Trump cannot solely implement these items. Congress must pass them. Regardless of what Trump may be used to in the business world, Washington does not move as quickly.
Once Trump takes the oath on Friday and moves into office, if there appear to be delays or concerns in whether these policies will be enacted, markets could reverse from some of the “Trump Rally” gains. This is part of the reason the market has stalled recently.
In summary, in the very short term, we could have some reversal of the market but probably not a major correction.
Timing Bucket #2: Near Term
I don’t know the exact time frame of any of these buckets. We cannot ever predict exact tops and bottoms in markets. We can only understand where we are at on a macro level and prepare ourselves accordingly.
I’m assuming that at some point from the first 100 days to one year, President-elect Trump will get some of these policies enacted. Maybe it’s lower corporate tax rates or the foreign cash tax holiday. Maybe it’s removing some Wall Street regulation. I think the tax holiday is the most likely to occur in the near term.
As some of these policies are implemented (or it appears they will be), the stock market will continue higher. Everyone will get excited and the market will begin moving toward the euphoria stage I believe needs to occur before a crash.
Remember what I’ve said before: markets do not crash when people expect them to crash. They crash when everyone thinks they will keep going higher. As Trump gains some momentum with new policies, everyone will begin to think, This is it. He did it. You must be in the market. Trump is Reagan all over again.
Timing Bucket #3: Sometime after the Near Term
But none of these policies will actually improve the economy. The tax holiday will just cause more share buybacks. And since stocks are already overvalued, buying back shares will destroy shareholder value. If you think a tax holiday will result in more jobs and increased research and development, you’re watching too much mainstream news.
I’m all for lower taxes, but they will not have the intended impacts on the economy.
And all of these policies lead to larger deficits in the US. Rising interest rates on already record levels of debt plus on newly added deficits will end up making the economy even worse.
How long until the market says enough is enough? I wish I knew. As I’ve mentioned before, I expect that in three to seven years this will all come to fruition. And I lean toward the shorter side. But I don’t know.
The government is very creative at pushing out the pain, which means the inevitable is going to be much, much worse when it does occur.
But as the market rises and euphoria sets in, none of the policies are actually improving the economy—and rising interest rates are actually hurting the economy—and the market will eventually crash. I’m not going into further detail here because this is what I’ve explained in my book. This newsletter explains how you deal with the contradictory information and timing.
Ignore the Timing
In summary, I believe we’re going to have a pullback, then a solid run higher, and a major correction. But I have no clue when each will occur. Luckily for us, it doesn’t matter.
We’re 25-45 years old and have over 20 years until retirement. So ultimately we can ignore all of this contradictory-sounding information, which is really just an unknown about timing—unless you are actively trading the market, which I’m not because that is too complicated. I just want to build long-term wealth, not gamble in the attempt for short-term profits.
If the market corrects in the very short term, I don’t care. If the market goes up in the near term, I don’t care. And if the market crashes in the next three years, I don’t care.
All I know is the market is overvalued and at some point will crash. My portfolio is structured to make me gains over the next three to seven years with little action in between. And I have the cash to take advantage of the cheap assets that will become available.
Note: If you want more specific details on how I’m approaching this long-term wealth building, check out my proprietary asset allocation guide, Let Your Asset Allocation Build.
I don’t get concerned with someone telling me the “Trump Rally” will reverse. I don’t get concerned with someone telling me I’m going to miss out on all the gains from Trump’s policies.
I have a full-time job and it’s not as a trader. I’m prepared for a crash, own some quality dividend-paying stocks, and subscribe to a few newsletters that scour the market and recommend the few value stocks that exist today.
So you can ignore the issue of not knowing the timing of the pullback, run higher, and crash, because you have a long-term horizon. You just prepare your portfolio to prosper and be protected over the long-term. Which means you can ignore all the noise that everyone else is making.
I’m only telling you why the market may rise in the near term so you do not get emotionally pulled into making bad decisions, and so you can remain confident in your long-term strategy.
If you want to “chase” these short- or near-term moves in the market, good luck to you. You may be smarter (or luckier) than I am and make some large sums of money. But I’m not gambling with my retirement by trying to predict timing.
I’m gladly going to sit calmly on the sidelines, watching people have their days of euphoria. And when reality sets in and they lose their “fortunes,” we’ll be there flush with cash, ready to take their great assets off their hands at rock-bottom prices.
Setting ourselves up for even bigger gains over the long term. I hope you decide to join the boring team and watch all the excitement of the Trump policies from the sidelines while being positioned to maximize your long-term wealth.
To your health, wealth, and personal freedom.
Chad A. Walker, CPA, MBA
P.S. A few quotes from Bill Bonner and his January 2017 Issue of The Bill Bonner Letter I’d like to share:
“The past 36 years…and particularly the past eight…have made U.S. Stocks very expensive. Most likely, and no matter what, the future will make them less expensive.”
“The average business expansion only lasts 69 months; this one has been goin on for 91 months. The average bull market lasts 52 months; this one has gone on for 94.”
“Ever since Woodrow Wilson won the White House in 1912, a recession has begun soon after a two-term president leaves office. This could be coincidence. Or it could be a pattern anchored in politics.”
“If you are trying to time the markets, 2017 is likely to be a good year to be out of stocks and bonds. There will be better times to buy….We are in for a rough spell, but I’m not going to take stocks completely out of my portfolio.”