FYI | Dec 14 2016
By Peter Switzer, Switzer Super Report
With the Trump rally looking like manna from heaven, the big question is: can it last? As you know, I had a good outlook for 2017, pre-Trump, so I think we’re in for a great year, provided the new US President keeps some promises and breaks others.
His tax cuts, infrastructure spending plans and easier financial regulation will all be fillips for the stock market but if he overplays his anti-trade with China stance, then we could have a problem that could easily hurt the market confidence that has been feeding this surge in stocks since the November 8 election.
As I pointed out on Saturday, our stock market index is up 7.8%, the S&P 500 on Wall Street has put on 5%, while the Dow is up 7%.
But these are nothing compared to the Russell 2000 small cap index, which is up 16%. And the S&P Mid Cap 400, which is up 12%!
These are huge rises, which makes me think a pullback has to happen and I want it to because I don’t want this Trump-love to turn the US market from the current optimism to market euphoria. That said, that pullback could be a few weeks off yet.
I’ve said this many times before but I can’t resist again making the point made brilliantly by Sir John Templeton that “bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.”
Without Trump, the optimism and euphoric stages would have come slower and so he could choke off the market surge earlier than what a President Clinton would have, but it will rest on the economic results of his policies.
If his promises deliver surprisingly positive policies and potential economic expansion, then business investment from US companies will kick higher and all this recent leg up of the rally will be justified. And if it’s a really good effort from Donald, then stocks can go higher in 2018, and even 2019.
The economic response from business and even other world governments could set us up for a few more years of good-to-great growth and that would drive stock markets skywards. However, if the economic results from his hefty promises don’t make “America Great Again”, revaluations of stock prices will happen and then they could slump or only rise at a much slower and more suspicious rate!
Similarly, if Donald overplays his trump card (sorry, couldn’t resist it) and takes on China, then his good economic progress at home could be offset by silly trade wars and stocks would suffer.
Fortunately, there’s still life in this old bull market right now but a healthy pullback, say in late January or February when reporting season kicks off, would be a good thing to ensure that we don’t encounter a pre-mature market death.
Of course, this week’s expected interest rate rise by the US Federal Reserve could be a trigger for a bit of profit-taking, and what Janet Yellen says about future rate rises will prove important for stocks going forward.
By the way, stock markets haven’t had a great performance in the first year of a US Presidency but a Republican has been better for stocks than a Democrat.
The ABC website refers to Ned Davis Research, which notes that “the S&P 500 posted its weakest returns in the first year of the four-year election cycle. Since 1900, stocks have gained just 3.4% on average in the post-election year, compared with gains of 4.0% in the mid-term year, 11.3% in the pre-election year and 9.5% in an election year.”
I’ve been watching stock markets for years and I’m quite sure that this is a market overreaction but it’s the kind I like.
Prior to the US election, Mavenwealth.com looked at US investor sentiment after pointing to a range of bullish indicators for stocks pre-election and even pre-Donald. This is what they found and concluded:
“History has shown that the crowd can be right during trends, but tends to be wrong at extremes. Sentiment can be used as a contrarian indicator, because if everyone who might become bearish has already sold, only buyers are left. This, of course, applies to the reverse as well.
Sentiment polls are one way to gauge investor sentiment, and so far this year we’ve seen an unusually high level of fear. For instance, the American Association of Individual Investors (AAII) Sentiment Poll has seen the percentage of bulls below 30% for eight consecutive weeks. That is the second longest such streak in 22 years. Additionally, going back to 1987 when the weekly poll started, the average number of bulls has been 38.5%. Incredibly, the bulls have come in below this number for a record 49 straight weeks, trouncing the previous record of 33 straight weeks.”
This correlated with a lot of money on the sidelines and I know I have talked about many fund managers, who have come on my show telling us that they had 30-40% of their fund in cash, so it hasn’t just been amateur investors playing cagey with their cash.
I liked that lengthy Maven Wealth piece as it explained how investor sentiment can get it right and wrong.
Now we have an uptrend and investors are piling in taking their money from the bond market and other safer havens and it’s likely they will be right. Right now, the trend favours big cap stocks in Australia at the expense of mid-cap and small-cap stocks, but eventually the good ones, which have been dumped so fund managers could get money to rotate into bigger cap stocks, will be snapped up by the same fund managers as more money flows into their funds.
This is how I see stocks rising, albeit with ups and downs, over 2017. The job I will have is working out when this Trump rally has been overdone and no more buying opportunities remain. That’s my job and I’m happy to do it.
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
Content included in this article is not by association the view of FNArena (see our disclaimer).
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
