The Donald Can’t Stop It

The Dow’s march onward and upward toward 30,000 continues without reservation.  New record all-time highs are notched practically every day.  Despite yesterday’s 31-point pullback, the Dow’s up over 15.5 percent year-to-date.  What a remarkable time to be alive.

The President, Donald Trump, is pumped!  As Commander in Chief, he believes he possesses divine powers.  He can will the stock market higher – and he knows it.  For example, early Wednesday morning he blasted out the following Tweet:

“Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase.”

Four minutes later, he sent out another Tweet:

“…if Congress gives us the massive tax cuts (and reform) I am asking for, those numbers will grow by leaps and bounds.”

Who knows?  Maybe President Trump is right.

These days even bad reforms – and just about everything else – are good for stocks.  And what’s good for stocks is good for everything.  For instance, according to President Trump stock market gains reduce the national debt.  He even said so this week.

President Trump’s logic for how higher stock prices reduce the national debt was unclear.  But it certainly sounds good to say.  More importantly, it sounds bullish.

Smart and Savvy Investors

On the other hand, obvious risks and hazards no longer matter.  Not the prospect of nuclear war with North Korea will stop this bull market.  Not the gold backed yuan oil exchange agreements being developed between Beijing, Moscow, and Tehran, and the implications for the petrodollar’s reserve currency status.  Not weak jobs numbers.

So, too, runaway government debt, consumer debt, and corporate debt haven’t fazed the stock market’s trajectory.  Because everyone loves debt.  Especially bankers.  They want more debt so they can buy more stocks.

Nosebleed level valuations don’t matter either.  Because, if you haven’t heard, high valuations are no longer high; they’re permanent.  Likewise, the beginning of the Fed’s great unwind of its $4.5 trillion balance sheet has hardly elicited a flinch.

President Trump’s shoddy tax reform proposal, the proposal that would tax income that’s already confiscated via state and local taxes, hasn’t done a thing to deter today’s smart and savvy investors.  Why should they care about taxes when, thanks to The Donald, their portfolio wealth has increased by 25 percent since election day?

Of course, smart and savvy investors, particularly buy and hold index investors, have reaped plentiful fruits for mindlessly plowing their capital into low cost S&P 500 index ETFs.  Indeed, this strategy has worked well for nearly a decade.  Surely it will continue, right?

A passively managed S&P 500 Index ETF, such as the SPDR S&P 500 ETF (NYSE: SPY), is up over 279 percent since March 9, 2009.  Investors that merely bought and held have been rewarded for their lack of discrimination.  Conversely, those who scratched their head, did some homework, and concluded that the market’s fundamentals are deficient, have been sorely punished.

The Donald Can’t Stop It

Yet, while SPY investors have experienced the delightful sensation that comes with a burgeoning investment portfolio, they’ve also been handicapped.  The extended bull market has lulled them into believing that investing is easy.  All you need to know are several simple rules.

Buy and hold the SPY.  Dollar cost average.  Eschew individual stocks.  You’ll always come out ahead over the long-run.

A SPY buyer doesn’t need to study businesses to understand which ones are profitable and which aren’t.  They don’t need to bother with the tedious task of analyzing a company’s financial statement and making inferences about its growth prospects and risks.  They don’t have to read footnotes.  They don’t have to do any work.  They don’t even have to think.

But not only has the bull market made the SPY popular for individual investors.  It has also made it a popular investment for funds and institutions.  This combination has served to relentlessly push the market higher, even though there’s no fundamental rhyme or reason to justify it.

Certainly, buying SPY has been a great strategy over the last eight years.  Who can argue with 279 percent returns?  However, it’s unlikely to be a good strategy over the next eight years.

You see, passively managed ETFs that simply mirror the movement of the S&P 500 are a fantastic investment vehicle when the stock market rises over an extended period.  On the other hand, in a bear market, when there’s a protracted stock market decline, these passively managed index tracking ETFs are terrible investments.  When the stock market crashes by 50 percent – which it likely will, these ETFs will also crash by 50 percent.

No doubt, with each passing day, the bull market moves closer to the next bear market.  That’s when the trajectory will no longer be up.  But, rather, it’ll be down.  That’s when SPY portfolios will vaporize as the herd attempts to panic out of the market at precisely the same moment.

What’s more, when push comes to shove, The Donald can’t stop it.

Sincerely,

MN Gordon
for Economic Prism

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