The often repeated investment strategy of “buying low and selling high” is one that everyone already knows. It sounds so simple you’d think even a four year old could do it. But anyone with a modicum of investing experience knows this isn’t always the case. Obviously it would be easy to do if it were possible to know when stocks, or even entire markets, are about to go bust. The reality, however, is that markets are fairly unpredictable; in fact, they behave in ways that seem to suggest they have brains of their own. This is especially true the more short term your investment view happens to be — because economic trends are easier to spot when stretched over longer periods of time. So while you might think a stock is going to go up, it’s always possible a company’s value will go down — way down — just to (seemingly) spite you. That’s why, despite what anyone tells you, there’s always an aspect of chance when investing in the market.
So what about now?
The market, at least in the US, is currently rocketing towards levels that we’ve never seen before. This is kind of surprising given that almost everyone was expecting the market to crash in the event of a Trump win. Truth is, the market did go down after the election during after-hours trading. What happened the next day, however, surprised almost everyone. Since Trump’s election things have been so good many are saying the Dow Jones Industrial could reach the unheard level of 20,000 points! Just like BREXIT before it, it’s almost as though everyone missed the original memo: a Trump win was supposed to mean doom and gloom.
So what gives? There are a couple of reasons for this seemingly contrarian surge. For one, Trump has promised quite a few investment-related goodies. The most often quoted has been Trump’s promise to lower taxes — especially for high earning individuals and corporations. Trump’s plan is essentially trickle down economics part II (or III if you count Bush’s presidency). Whether cutting taxes has a positive effect on the economy, however, is controversial, and there’s no shortage of debate around the impact of tax cuts on markets.
Trump has also promised fewer regulations, saying that he’ll eliminate two rules for every one his administration introduces. If you’re an environmentalist, this announcement probably terrifies you. If you’re a laissez-faire capitalist, however, this is nothing but the sweet music of Mozart for your ears. Regardless of your priorities (breathable air or money in your pocket) it’s no secret that government rules are costly and troublesome, often creating delays and bottlenecks that stifle economic growth. So from an economic point of view, fewer regulations are seen as a boon.
What goes up, must come down
Now that Trump has won the election, and things are looking up for investors, what will this mean for our portfolios over the long term? The short term has already shown us that a Trump presidency will be good for our bottom line. Take me; I’m just a small-time investor and already I’ve felt the positive impact of a Trump presidency. But the long term might not be so rosy. In fact it could get pretty ugly. The following are three problems I potentially see happening.
Potential Problem #1: Trade wars
It’s no secret that Trump dislikes NAFTA and the TPP. In fact most believe that the TPP is already dead. As for NAFTA, nobody knows what the future holds. Of course the president can’t act alone, and will need to get congress on board. Interestingly, Trump’s views on trade is one area where he differs the most from mainstream Republicans. Up until recently, trade agreements were seen as the GOP’s bread and butter. The more trade the merrier they became! Whether that will continue to be the case remains to be seen. Changes to NAFTA, for example, could prove problematic and cause more problems than fix them. Depending on what happens, the retooling of NAFTA could disrupt trade with America’s greatest trading partner: Canada.
Then there’s China, America’s second largest trading partner. On this front, Trump seems pretty intent on shaking things up. First it was his decision to accept a congratulatory call from the President of Taiwan– which brushed aside the “One-China” policy every president since the 70s has respected. Not surprisingly, China called him out on this diplomatic faux pas. Trump, in his typical fashion, decided his response would be to double down instead of apologizing. On his now world-famous twitter account, Trump has since accused China of manipulating their currency, among other things. Where it goes from here is anybody’s guess.
My point is that Trump seems pretty serious about renegotiating (or perhaps even getting rid of) various trade agreements — all the while taking on other large trading partners to task. This is unheard behaviour in recent presidential history, and nobody knows what effect it’ll have on the American economy. Of course, there’s also the possibility that Trump is all talk. In which case, business will carry on as usual.
Potential Problem #2: Class Warfare
I found this article on Reddit the other day which argued the idea that Republican controlled governments have historically been bad for the economy. This is obviously debatable. For example, the Dot-Com meltdown during the early 00’s happened under Bill Clinton’s watch (with a Republican controlled congress). The more recent financial crisis of 07-08, however, happened under Bush, again with a Republican controlled congress. I’m not an economist, so I’m not going to pretend that I’m fit in anyway to comment on this, but I did find the study interesting. That being said, it seems Trump once held a similar point of view!
Regardless of where you fall politically, it’s common knowledge that Republicans have historically been the cheerleaders of supply-side economics. Yet ever since the Reagan era, income distribution has become increasingly lop sided, pushing the gap between the haves and the have-nots further and further apart. This might have been great for those of us with large portfolios, but how long can this go on (realistically speaking) before the system breaks apart? Trump largely won the election because of his appeal to blue-collar workers (despite being a billionaire) — workers who are finding themselves increasingly jobless and marginalized by the changing economy. Whether Trump will alleviate or exacerbate their problems remains to be seen. My point, however, is that the symptoms of economic disparity are already starting to show in the political sphere. People are angry! Will this blow up during the next 4 to 8 years? And if so, what will this mean?
Potential Problem #3: Debt
This one doesn’t have anything to do with Trump, since the problem existed long before he even put his hat into the presidential race. Nevertheless, it has the potential of blowing up during his “reign” as Commander in Chief. Never mind America’s huge national debt, what really has some economist worried is the worrisome number of people who are falling behind on their student-loans, auto-loans and credit card debts. Taken together, these three problems have the potential of creating a bubble which could make the financial crisis of 07-08 seem like a practice run. What Trump decides to do during the next 4 years, therefore, will have a significant effect on how these three scenarios will play out.
And if it weren’t already bad, the global economy has barely recovered from the previous financial melt down. Accordingly, interest rates are still at near record lows while many countries remain barely solvent. This means the the world’s various national banks have very little room in terms of alleviating new economic problems, while other countries will be hard pressed to shore up their economies by spending more money — as some have traditionally done in the past. Not to be alarmist, but we are quite possibly on the brink of the mother of all corrections.
So there you have it. The Trump presidency is rife with uncertainty – for reasons both related and unrelated to him. What do you think? Has the time come to sell our stocks while they’re at an all time high? Or is there still time before the inevitable cyclical crash — or worse? Tell me what you think in the comments below.
As always, thanks for reading.