Perhaps ironically, the stock market may be more inclined to undergo a long-needed unwind of its excesses and in quicker fashion under the new, more free market-oriented administration.
The following first appeared as part of J. Lyons Fund Management, Inc.’s 1st Quarter 2017 Client Letter.
With the election of Donald Trump as our nation’s 45th president, the specter of a new market regime is a natural inclination. Whenever a new administration takes over, the community of journalists and talking heads attempts to school folks on the ramifications for the markets and their portfolios. The truth, however, is that (short-term Tweet-induced moves aside) A) the extent to which any person or entity can influence the market or the economy in the long-term is greatly exaggerated, and B) the extent to which one’s influence will be manifested is unknowable.
A case in point. Eight years ago when Barack Obama was elected president, the nation was in the throes of a financial crisis and the major averages had been sliced in half. Now, like him or not, Mr. Obama was certainly not considered to be the most market-friendly president to come into office. However, eight years later, he leaves office with the second best market “performance” of any president in the last 80 years.
Obviously, that market performance owes much to the timing of when he entered office. With stocks at rock bottom levels, in hindsight, they had nowhere to go but up. However, that was not obvious at the time nor during the 8 years along the way. Many market observers, including ourselves, have been looking for the next shoe to drop in the post-2000 secular bear market. With stocks hitting all-time highs again, that shoe has yet to drop.
Outside of the timing of when Obama entered the White House (which is far and away the dominant determining factor for a president’s stock market performance), how else can we account for the market’s relatively smooth ride? That answer likely lies within the realm of “B” mentioned above.
As with news events, one can never know what impact a president’s politics and policies will have on stocks. In the case of Mr. Obama, our guess is that his desire to maintain the status quo, monetarily, was the main factor in helping to buoy the market.
Specifically, the Fed’s campaign, and Obama’s support therein, in maintaining an unprecedentedly accommodative monetary policy ensured that a massive amount of liquidity was available at all times. However destructive the policy may be in the long run, the determination of Mr. Obama and chairmen Bernanke and Yellen to disallow (painful but necessary) corrective action on their watch undoubtedly aided in the advance of the equity market.
The question now, and where considerable room for surprises many lie, is in President Trump’s allegiance, or lack thereof, to the status quo. We say “considerable room” because in just the first few days in office, he has probably demonstrated less interest in maintaining the status quo than the last several administrations combined. And to the extent that less status quo, i.e., tighter monetary policy, means less support for rising asset prices, the stock market may be more vulnerable to that proverbial next shoe to drop.
This may seem counterintuitive considering we now have a president who is perceived to be more economy, business, and market-friendly. The irony is that if in fact the financial system is placed back more into the hands of the free market and out of the invisible hand of the central banks, we may just get the long overdue corrective action the system needs. And while Mr. Trump is no doubt as eager as anyone else to avoid serious economic and market corrections on his watch, his proclivity to adhere to what he feels is right may indeed increase the odds of that happening.
And no, the seeming hypocrisy of our opining on Mr. Trump’s influence on the market after our opening salvo does not escape us (see, even we are not immune to it). However, we stick to our original point that the market is going to go where it’s going to go eventually, regardless of the actions of a commander in chief, Fed official, etc. Our aforementioned speculation merely pertains to how easily and how quickly it will arrive there. And if our assessment is correct, the market may be more inclined to undergo a long-needed unwind of its excesses in quicker fashion under the new administration.
In the shorter-term, this will be painful. In the long-term, it will be necessary.
More from Dana Lyons, JLFMI and My401kPro.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.