The next chart shows the annual returns for the S&P 500. Again, nothing screams “regime change” here. I know, you’re thinking, “well, it’s only February. You can’t compare a whole year to just the first 2 months of the year.” Valid point, so let’s take a look at where this year’s returns-to-date stack up against those previous years, by looking at the seasonality chart.
As you can see from the chart to the right, 2017 (bright red) again seems to fall within the range of what we might expect. While the returns are terrific, they certainly don’t appear to be outliers, nor should they be characterized as a turning point.
Even looking at the quarterly returns doesn’t produce evidence of some dramatic event or of being representative of a euphoric shift in sentiment.
Someone sent me an article from MarketWatch, which claimed the stock market’s returns during Trump’s first month in office were bigger than any President in the last 70 years.
Turns out, you don’t need to go back 70 years. In fact, the period following Obama’s reelection just four years ago outpaced Trump’s current run.
Having put that to rest (hopefully), let’s focus on why the “Trump Rally” is nonsense, both now and going forward, and why even as it continues to rally, it still won’t be reflective of a bustling economy nor should it serve as evidence of a turning point. The only thing that would serve as a signal that something has actually changed from an economic perspective is government funded spending or a rise in taxation. Neither of which seems likely at the moment. Before I go on, let’s review what I’ve been saying for years now so that we know what I mean when I say “changed”.
There is no apparent driver of growth, not in the US and not globally. In fact, there is no reason to be optimistic about the economy, especially if you factor in the policies Trump is primarily focused on, population reduction and trade barriers. Yes, that’s my view today and has been my view since the crisis. Although it may sound contradictory, for years I’ve also been and continue to be, bullish on equities, particularly equities in the countries where the majority of the world’s wealth is owned. The reason has nothing to do with growth expectations or even earnings. Instead, it is based solely on my belief that we are experiencing a period in which key decision makers are more risk averse than perhaps any other moment in modern financial market history. Yes, I’ll say for the umpteenth time. The stock market rally is evidence of extreme risk aversion, as is the savings glut in general.
President Trump’s policies to date have been about further dampening growth, increasing risk aversion and shifting more of the world’s wealth out of the hands of spenders and into the accounts of savers. All of which means this isn’t so much a regime change as it is an acceleration of what we've been experiencing for the past 20 years. As such, we should expect more of the same from an asset allocation perspective. The only signal worthy of reassessment would be an actual, rather than rhetorical, ramp up in new fiscal spending. Even then, it would only make me more bullish US stocks.