“The post-election landscape euphoria is being driven by hopes for deregulation, government spending cuts, the extension of the Trump tax cuts, and a focus on technological innovation. This will turbocharge the US economy more powerfully than during the Reagan Revolution of the 1980s.”
Those are the words of Cathie Wood, famed (infamous?) money manager and portfolio manager of the ARK Innovation ETF, among others. Color me skeptical.
To start, it’s possible these things may be true. I would love nothing more than the United States to be more competitive in the global landscape, to be more energy independent in the true sense of the phrase, and to be the vision of that shining city on a hill. I put this likelihood around 30%. I think a lot of American consumption depends on consumer confidence. And to that end, the consumer should, on the margin, feel like things are getting better instead of worse. But this tends to happen every time a change in administration occurs, and one needs to look no further than the last two presidential elections to see the market optimism following the results.
The more likely scenario is that the market is on a bit of a sugar high. We have some positive seasonality and as Callie Cox writes, November, on average, is the best month of the year (election or no election).
In our opinion, much of the potential major benefits of the policy changes are already priced into the market. Ben Graham said it best, “today’s investor is so concerned with anticipating the future that he is already paying handsomely for it in advance. Thus what he has projected with so much study and care may actually happen and still not bring him any profit.” The stereotypical “buy the rumor, sell the news”. Combine that with our starting point of 23x earnings for the S&P 500, instead of 16.5x earnings in 2016, my guess is that the rally may not “stick” this time.
This is all not to say that the economy or the stock market is going to crash, but trees don’t grow to the sky. It’s often the car you don’t see that causes the accident, and we continue to believe that caution in adding additional capital to equities (large cap equities specifically) at nosebleed valuations is warranted.
Happy Thanksgiving!
– Adam