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Market Commentary

Market complacency

By February 1, 2017No Comments

For years there was a leadership vacuum in the West, exemplified by the unwillingness of politicians to address the problems laid bare in 2008, and the passing of the policy baton to unelected central bankers.

So electorates have taken charge. In the UK they have decided on a policy route which would never have been driven by the political classes. In the US they have completely rejected the political classes, and gone for Trump.

It is President Trump who has been grabbing the headlines. As Management Today puts it
“The recipe for Trump’s success with voters is the same one that brought him his billions in the business world. He typifies charismatic leadership, where force of personality is more important than collaboration or cold reasoning”. The characteristics are ambition, aggression, and a willingness to do deals.

He will be content to change his mind, so long as it is his idea (some campaign promises have already been reversed or forgotten). Upsetting people will not be a concern (clearly!), and his energy can drive huge activity (already observable).

Within a business this can work very well (and those around you get used to what seems chaotic). But as “the leader of the free world” it is a recipe for a highly emotionally charged environment, already seen in the media. This should also be reflected in financial markets. Yet, interestingly, other than knee jerk lurches after both the Brexit vote and the Trump election, complacency prevails in markets.

For example, we have highlighted numerous times that the US stock market is overvalued. By virtue of the cyclically adjusted price earnings ratio (CAPE) it would have to fall 40% just to return to its long run average (currently 27.3 compared to long term average of 16.7). Yet markets can stay overvalued for years, and they can get more over-valued e.g. the US market is still somewhat cheaper than in 1999 – that really was a mania.

The US market is overdue even a sober correction. For example, since 1928 a 20% correction occurs a bit less than every 2 years on average – it is now over 5 years since the last 20% correction. This is VERY stretched.

Will it be the economy which cracks and brings the market down with it? Trump might be the most unpopular new President in US history, but sentiment measures in the US are soaring. And such confidence drives decisions which underpin growing economies. This hints that Americans have, so far, warmed to the idea of strong leadership (which is important) if not the leader (which is less so).

Yet sentiment is fickle. We have two regular reads whose authors are close to events in Washington.

John Mauldin is very close (though no Trump supporter). While in Washington in recent days he was briefly allowed to glimpse the workings of one department. He was very surprised at the level of detailed planning which was taking place and was told this is taking place across all departments. This is encouraging to a point.

In contrast, Dave Rosenberg found that at least half of those he questioned (who aren’t protesting on the streets, but sober-suited types behind desks) are “scared out of their wits”.

Dave also makes the point that the sentiment indicators are at odds with a US economy which slowed in the 4th quarter, and had another anaemic year of growth (though still better than most developed economies).

The “Great Divide” in the US isn’t just between the haves and have nots, but also between hope and reality.

Nationalism, populism, and isolationism are uncomfortable trends (and for the avoidance of doubt, we should all remember that they are global trends which preceded President Trump).

More positively, the lastest TopFunds Guide is now published – not only do we note that 2016 generated much better outcomes for investors than the media headlines imply, but there are a raft of opportunities for 2017 too – don’t get too distracted by Trump.

Do email back for your copy or get in touch with your usual contact.

Dennehy Wealth