No Surprises Allowed

It has been some six weeks since the new administration has taken office in the U.S. In that time the equity markets have continued to make new highs in anticipation that our new President will achieve all he promised during the campaign. So, let’s take a minute or two and review just what has been accomplished to date: 

·     The nomination of a Supreme Court Justice, Neil Gorsuch, an outstanding judge who should be approved. 

·     A rollback of business regulations, to what extent and meaning we are yet to discover. 

·     Discussion regarding Obama care of which the only thing that has become clear, it will not be easy to reform let alone abolish (as some would like). 

·     Tax reform? Lots of discussion and promises, but nothing set in stone as of today. 

·     Immigration reform, none. Only what one can conclude as a martial law type of order, as the Federal Appellate Court struck down the President’s executive decision to ban seven Muslim countries from entering the U.S.  

·     The attacks on the free press, a cornerstone of any democracy continues, including most recently banning certain journalists from attending White House briefings. Now I am not blindly defending the free press, the press has caused this backlash on themselves, and is not trusted by many, not just the administration. The press must closely examine why the miss trust is there and why the President’s attacks are so frequent and harsh. At the same time, the President must be very careful in his all out assault against a cornerstone of our democratic system.  

·     Lastly, we must acknowledge the fact that the President has managed to alienate some our closest allies and trade partners.

So what gives? Why are the markets at all time highs? It is true that corporate and investor optimism is very high. There is a widely accepted view that the new administration is very business friendly, and expectations are running up the optimism. For me, with 30 years of hands-on market experience, this is a concern. I concur that the new administration is very business friendly, which has been a relief for businesses and investors after eight years of an administration that was clearly not friendly towards them. Even though I have much praise for the Obama administration, its anti-business agenda was not helpful. At the same time, as of this writing, we are yet to see any real concrete policy to sink our teeth into by the new administration.  

And that leaves us where? It would appear that we are at a point of maximum risk, meaning the higher likelihood outcomes are very much binary. Either President Trump accomplishes all he has stated with no negative fall out and the markets continue to rejoice, or, any missteps will be cause for significant indigestion by the markets.

For those who focus on wise investment results, one must constantly remind themselves of the importance of managing their current capital. What do you have in total today, and how much risk and volatility do want to expose it to in order to achieve your longer run objectives while still sleeping at night. It is a discussion with yourself on balancing the notion of capital preservation with smart growth. My experience is that preserving one’s principal is the top priority, and today I would be extremely risk adverse in my portfolio allocations. As of this writing, the S&P 500 is are up over 10% since the election, with small caps even higher (price only). I would encourage readers to take the view of “thank you very much”… it’s now time to de-risk the portfolio.

Current valuations are assuming a lot of good news in economic and earnings terms will keep rolling in for us to see. Factset reported last week that Q4 year over year earnings for the S&P 500 were up again for the 3rd quarter in a row. Terrific! Yet, those same stock market valuations are in their top % quartiles compared to history. All very high, not only fundamental (price/book, price/cash flow), but on price as well.

So the question of the day is this… does current stock market exuberance based on hopeful administration improvements in wages, taxes & recent good earnings data actually trump (sorry) the reality of an over-valued market?? In my opinion, we should wait and see if there is some catch up… reality meeting expectations. The historic battle within the market is always between sentiment and statistics. We currently have upbeat sentiment with only 1 good statistic: earnings. The other side of the see-saw is full of top heavy statistics and that might bring things back down. And if it does, then what? The last 2-3 years has shown that after each selloff we have returned to line within a couple of months or less. I opine that if we have another one it might not be dissimilar. The question is whether you want to ignore it and hope for the best or have some powder dry to buy cheap or even just sleep well. Or, if you have dry powder now, buy further into the market in small steps every couple of months…

In closing, my focus is always on the financial markets and economics, yet, I cannot ignore the current political climate. The purpose of this update is not to convince anyone of any particular view, we are all entitled to believe as we wish. However, to ignore the current political risk, not just in the U.S. but also across the globe, is pure foolishness. Buyer beware, investor prepare and balance your thinking.