MW Why the stock market's 'Trump bump' could become a 'Trump dump'
By Paul Brandus
Are you sure you know more about the stock market than Warren Buffett?
Three deeply respected stock-market metrics are flashing red. Big, bright red.
Between Inauguration Day 2021 and Election Day 2024, the S&P 500 SPX rose about 51%. I can't help but ask why everyone's sure that further gains of that magnitude are repeatable, just because Donald Trump has won a second presidential term. Why, because stocks have soared in the week after his victory? It's only one week. A good one, yes, but only one.
To those who are sure the "Trump bump" will continue, here's a question: Are you sure you know more about the markets and investing than Berkshire Hathaway $(BRK.A)$ $(BRK.B)$ Chairman and CEO Warren Buffett - who has been busy dumping shares of Bank of America $(BAC.SI)$ and Apple $(AAPL)$, among others, and building Berkshire's cash reserves to a massive $325 billion?
Why are you buying when the "Oracle of Omaha" is selling? What do you know that he doesn't? And conversely, what does Buffett know that you're missing?
Amid the past week's euphoria, perhaps what Buffett - who, at 94, remains a voracious reader and student of market history - quietly understands is that a variety of deeply respected stock-market metrics are flashing red. Big, bright red. Among them:
-- The Shiller CAPE ratio is higher than 97% of the time dating back to the 1880s, including the period just before the market crashes of 1929 and 2008. The Shiller CAPE (Cyclically-Adjusted Price-to-Earnings) ratio is calculated by dividing a company's stock price by the average of the company's earnings for the last 10 years, adjusted for inflation.
Buffett - a value investor who manages risk by avoiding overpaying for an investment - pays close attention to this:
-- The Buffet Indicator - named for the master himself - is far higher than at any time in more than half a century. This is the ratio of the total value of the U.S. stock market divided by U.S. gross domestic product. Buffett has previously called this "the best single measure of where valuations stand at any given moment."
Perhaps you know better, but given that over the past six decades - 1965 to 2023 - Berkshire Hathaway's compound annual gain has been 19.8%, almost double the S&P 500's SPX 10.1%, I'd be more inclined to exercise caution, as Buffett is clearly doing with his massive move to cash. Here I'll repeat his well-known but always-worth-remembering phrase: "Be greedy when others are fearful, and fearful when others are greedy." A trite cliche, yes. But astute? You better believe it.
Of course, just because these historical measures tell us that valuations are overstretched, it doesn't mean that a plunge is imminent. Here I'm reminded of another investing legend, Seth Klarman, the chief executive and portfolio manager of Boston-based Baupost Group. A value-stock buyer and margin-of-safety investor like Buffett, Klarman, whose track record dates back to the early 1980s, notes: "Overvaluation is not always apparent to investors, analysts or managements. Since security prices reflect investors' perception of reality and not necessarily reality itself, overvaluation may persist for a long time."
Other than Trump and some of his advisers, few really believe that a tariff war - with the resulting inflation that will surely hit American consumers - is a net positive.
How long? Perhaps not long at all, given the troubles that may surface in 2025.
For example, other than Trump and some of his advisers, few really believe that a tariff war - with the resulting inflation that will surely hit American consumers - is a net positive. A tariff war will generate friction, perhaps even instability, with key trading partners in Europe and Asia.
Investors like certainty; this is the opposite. And why don't more investors get that more than 41 million American jobs - one of every three U.S. workers - depend on trade? The U.S. Chamber of Commerce, about as pro-business an organization as you'll ever find, notes that these figures have nearly tripled since 1992 "due in large part to the trade-opening policies reached at the end of the 20th century to now."
And what makes anyone think Trump's tariffs will work any better this time around than they did during his first term? A study conducted in January 2021 - just as Trump's presidency was ending - estimated that Trump's tariffs cost almost 250,000 American jobs, while another study said the trade deficit - which Trump said he would eliminate - soared on his watch.
What might drive stocks higher? Corporate profits, which, like the overall market, have soared over the past few years, could continue to rise, particularly if tax cuts from Trump's first term are extended. But in broad terms, the gusher of red ink and higher interest rates that economists say this would produce could offset any economic gains. The president-elect's vow to slash regulation and red tape could help, and Trump's first term did produce some progress here, but any impact on stock prices and investor portfolios is difficult to quantify.
If you really want to shrink government, try the state and local level.
One thing that the president-elect has said would juice growth - and which investors seem to have taken to heart - is his vow to shrink the size of government, which most people assume is bloated.
Is it, though? The St. Louis Federal Reserve says the federal workforce numbers 3 million. Guess what it was in 1989, at the end of Ronald ("The government is the problem") Reagan's eight years in office? 3.1 million.
Not only has the federal workforce gotten slightly smaller in absolute terms, it has shriveled in relative terms. In Reagan's day, those 3.1 million people were about 1.2% of the total U.S. population. The federal workforce today is about 0.9% of the population. This despite the creation of huge new departments, like the U.S. Department of Homeland Security after the 9/11 attacks in 2001.
And federal spending? You might find this surprising, but as a percentage of GDP, net spending - again per the St. Louis Fed - is only marginally higher than its average over the past few decades, and actually grew slightly during Trump's first term - even before his gusher of pandemic spending.
If you really want to shrink government, try the state and local level, where the workforce numbers some 20.5 million - almost seven times as large as the federal workforce. State and local workers aren't running safety checks on your food, don't man security checkpoints at airports and don't send you a Social Security check every month. No disrespect to those 20.5 million state and local government workers, but how come when people complain that "the government is too big," they always mean the feds? Seems like a fair question. Perhaps taking an axe to state and local government might be helpful?
So again, why be so sure that President Trump's second term will be great for stocks? Equities did well during Trump's first term. But they've done well on Biden's watch, too. And stocks did better during Barack Obama's eight years than either of them. In Buffett-speak, if you think it's a time to be greedy, then by all means back up the truck and load up on stocks. But don't expect to see Buffett, Shiller or Klarman alongside you.
More: Warren Buffett's growing cash hoard makes stock-market bulls nervous. Should it?
Plus: Trump's win sparked stocks for this surprising reason - and it's fueling the market rally
-Paul Brandus
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(END) Dow Jones Newswires
November 13, 2024 07:50 ET (12:50 GMT)
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