As Ben Graham said, ‘In the short-run the market is a voting machine—reflecting a voter-registration test that requires only money, not intelligence or emotional stability—but in the long-run the market is a weighting machine.’
Warren Buffet – Letter to Berkshire Hathaway Shareholders (1992)
All the major U.S. Indexes surged to new highs last week. It is important to keep in mind, in the spirit of the above quote, that short run price movements can be driven by factors other than fundamentals. In the long run, fundamentals are the key determinants of performance. At any moment, the market can be an emotional voting machine. Stock prices are the result of the prevailing story investors collectively believe. This week we provide links to a balance of commentaries explaining reasons for the run up and why caution is warranted.
Reflections on the Trump Presidency, One Week after the Election. Ray Dalio of Bridgewater Associates, the world’s biggest hedge fund, believes that in a Trump presidency we will have a profound ideological shift that is of a magnitude analogous to Ronald Reagan’s shift to the right. Donald Trump is poised to shift the current ideology in the US to one that puts “the stimulation of traditional domestic manufacturing above all else.” The new period is more likely to be characterized by 1) decreasing globalization, free trade, and global connectedness, 2) aggressively simulative fiscal policies, and 3) increased US growth, higher inflation and rising bond yields. We are in for one of those major reversals that last a decade or more. There’s a good chance that the economy/market will shift from what we’ve gotten used to, and what we will experience over the next many years will be very different from the prior periods. All this, plus fiscal stimulus will translate into additional economic growth, corporate tax changes, and less regulation will on the margin be good for profitability and stocks, though for domestically oriented stocks more than multinationals.
Fears about Trump and his economic team may be overblown. Many of the people under consideration for economic positions are capable people who have a sufficient understanding of how the economic machine works so they probably won’t recklessly and stupidly drive the economy into a ditch. The ideological/environmental shifts are clear, their magnitudes will be large, and there’s a good chance that the “craziness” factor will be small and play a lesser role in driving outcomes than many had feared. Click here to read
Emotional Rescue: What to Make of the Post-Election Surge? The stock market rally has confounded many investors given the pre-election consensus that stocks would fall on the uncertainty associated with a Trump victory. In 10 days the outperformance of the US compared to overseas markets has been to an extreme that has happened only 13 times in 30 years. Investor sentiment has decisively shifted from pessimism to optimism. Animal spirits have awoken, which can fuel rallies for an extended period. Stocks with the most attractive valuations have rallied the most. It reflects an environment with improving economic growth prospects. With the dollar up sharply, stocks of companies with the lowest exposure to international markets are up about three times the performance of stocks of companies with the highest exposure to international markets. We may be pulling some of next year’s performance into the final weeks of this year. Expect bouts of volatility as we move from speculating about Trump’s policies to actually facing their reality next year. Click here to read
An Update and Comment from Hoisington Investment Management. The outcome of the national election does not change their view of the trajectory of the economy for the next four to six quarters. The economy is extremely over-indebted, turning even more so this year. This will serve as a restraint on growth for years to come. Also, the economy is in an expansion that is 6 ½ years old. This means that pent-up demand for virtually all big ticket items is exhausted—apartments, single family homes, new vehicles, and plant and equipment. Markets have a pronounced tendency to rush to judgment when policy changes occur. When the Obama stimulus of 2009 was announced, the presumption was that it would lead to an inflationary boom. Similarly, the unveiling of QE1 raised expectations of a runaway inflation, yet neither happened. The economics are not different now. Click here to read
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Disclosure – The articles mentioned in This Week with J. Mark Nickell & Co. are for information and educational purposes only. They represent a sample of the numerous articles that the firm reads each week to stay current on financial and economic topics. The articles are linked to websites separate from the J. Mark Nickell & Co. website. The opinions expressed in these articles are the opinions of the author and not J. Mark Nickell & Co. This is not an offer to buy or sell any security. J. Mark Nickell & Co. is under no obligation to update any of the information in these articles. We cannot attest to the accuracy of the data in the articles.