First, let’s look at the rally. Since Election Day, all three major market indices have hit new record highs several times.
The Dow Jones Industrial Average rose from 18,332 on November 8 to 20,812 on February 28. In that same span of time, the S&P 500 climbed from 2,139 to 2,363, while the Nasdaq went from 5,193 to 5,825. Those are some “yuge” gains, as Trump might say, but remember that the size of a rally isn’t always indicative of its strength.
For example, the markets spiked again in response to Trump’s address to Congress on February 28, with the Dow surpassing 21,000. This happened despite his speech offering few new details about his budget or tax plan. That’s significant because from the start, this rally has been based more on emotion than reality. It’s been based mainly on optimism that Trump will be able to make good on his promise to grow the economy by 4 percent a year. Of course, no real impact from his policies has occurred so far, and most of the details of his plan remain unknown.
Already Priced In
In other words, the positive impact of Trump’s policies has already been priced into the market. That means that if and when we do start seeing signs that his promises are coming to fruition and positively effecting the economy, the markets might not climb much higher. They have to let actual growth catch up to the lofty heights they’ve already reached. For now, the markets are overinflated and out of whack with current corporate growth rates, and Wall Street is simply waiting for its optimism to be vindicated.
But what if isn’t? What if we start seeing signs that Trump’s plan isn’t viable, or it just takes too long to implement? Could the optimism that has fueled record highs turn into an equally potent level of pessimism that triggers the next major market collapse? If so, the price for buy-and-hold investors is likely to be far more significant than the potential reward. As I’ve discussed many times, historical evidence suggests that the next major plunge could be as steep as 70 percent, but should be at least 35 percent. How does that compare to the potential 5 to 10 percent additional gain the markets might achieve if Trump delivers? Does it make sense to hang in there for a gain that small if it means risking a loss that big? I’ve posed that question before, of course, and illustrated it with this analogy: would you ever play a casino game that paid $10 if you won but cost $35 to $70 if you lost? Probably not.
And, there are other signs that the “Trump Bump” is deceiving. Hard economic data since the election has been hit and miss, at best. At the same time, the 10-Year Treasury yield has stabilized at just under 2.5. That means investors aren’t fleeing the bond market and betting only on stocks—which is a clear sign that their optimism is actually cautious despite the hyped-up record highs.
Speaking of those records, consider these facts related to two of the most recent milestones: In the days leading up to Trump’s address, the Dow rose for 12 straight days, tying a record last reached in January of 1987. What people remember most about that year, however, is the fact that on October 19, the stock market experienced its biggest one-day crash ever. And, when the Dow surpassed 21,000 on March 1, it tied a record for the fastest 1,000-point run-up since 1999. What people remember most about that year, though, is that it ended with the bursting of the dot-com bubble, and the start of what I believe was the first major crash of our current long-term bear market cycle.
Aligning Your Income-Based Goals
As I pointed out last month, all these questions surrounding the “Trump Bump” should be largely irrelevant to investors over 50—provided they have rightly shifted their priorities from growth to protection and income. The truth is, everyone wants the same thing from their investments: maximum return with minimum risk. But, maximum return for what purpose? Achieving the right balance depends on investors knowing their retirement goals and understanding which of the following they are investing for: a lump-sum expenditure, maximizing their legacy, or supplemental retirement income. The answer should align with the goals they’ve identified. For instance, most people say their goals include things like traveling, dining out more, hobbies, and visiting grandkids. Most people also agree those aren’t things they’d want to pay for by selling investments; they would want to achieve those goals with a reliable income stream. So, doesn’t it make sense that they’d be trying to maximize returns in the form of income?
I often find that people unknowingly have retirement goals that are in conflict with their financial strategies. It’s because they haven’t yet taken the time to really think about their goals or the most sensible options for achieving them. They don’t realize that by continuing to invest primarily for capital appreciation, they’re not only carrying unnecessary risk, but they’re actually investing for the wrong purpose. They’re investing as though they believe they’ll have sufficient income without their investments and can put the investments toward an inheritance or a major purchase. Even if they do actually believe that, they usually haven’t considered that with lifespans now longer than ever before, they need to plan for retirement income of 30 years or more, or that if the inflation rate reached 5 percent, they would end up needing four times as much income at the end of their retirement as they needed at the start. At 7 percent inflation, they’d need eight times as much income!
As clients, you already know that there is an entire universe of investment options that align more practically with income-based investment goals than do risky stock-based strategies geared toward capital appreciation. If you have friends or family members who are nearing retirement and don’t know much about these options, take it upon yourself to help educate them. Exposing investors who are close to retirement to this kind of helpful information is especially important as media hype surrounding the deceptive and potentially dangerous “Trump Bump” continues.
Written by: Rosa Shala