Contributed by: Lewis J. Walker, CFP®
The stock market is not an escalator. Escalators are predictable, offering a smooth ride with the end point visible at the top. Of course, being mechanical, escalators can break down, malfunction, even cause serious injury.
The stock market is not mechanical or precisely predictable, despite a constant quest to divine market outcomes in patterns. Markets are driven at times by bouts of emotion, what observers often call “animal spirits.” Sometimes emotions are highly positive, pushing key indexes to new peaks. Conversely, widespread pessimism often drives stock prices to new lows and absolute bargain levels.
Despite the polls and conventional wisdom that Hillary Clinton would be the 45th president of the United States, and the dour predictions of a market rout if Donald Trump did win, the opposite occurred. Based on hopes of tax reform and other proposed pro-growth initiatives, key market indexes soared. Both the Dow Jones Industrial Average and S&P 500 Index hit all time highs on March 1, 2017. As we anticipate May flowers, both averages are bouncing around below the record highs. We cannot say that pessimism has set in, more a sense of “realistic caution.”
Call it the “100 days syndrome.” We live in a digital age of 24/7 news cycles. In-your-face news and political commentary exacerbates the actions of crowds, including market traders who move huge blocks of stocks literally in seconds. The focus on Donald Trump’s first 100 days is an example. Assuming a 4-year term, excluding a leap year, a president is in office for 1460 days. The first 100 days is only 6.8% of the time in office. You know from experience that in a new job, or even dealing with a newborn first child, there is a steep learning curve in any meaningful activity. Outsized expectations in a short burst are a precarious basis for a bet.
Where did the 100 days yardstick come from? The focus on 100 days started with a 1933 radio address by President Franklin D. Roosevelt referring to the 100-day session of the 73rd Congress, not the first 100 days of his administration. No president, Democrat or Republican, is going to walk on water in his (or her) first 100 days, let alone a full term. Politics and democracy are rough and tumble sports, exacerbated by a deeply divided electorate.
Mr. Market has decided that it may take awhile for President Trump to deliver on promises, and given a fractured and often dysfunctional Congress, compromise might water down pro-growth strategies. Market signals are flashing caution. Ten year Treasury yields have been falling, not rising, indicating concerns that growth may come slower than anticipated. Stock market leadership has shifted. Investors have rotated out of financial shares that reflected “Trump bump bullishness,” and into defensive sectors like utilities and real estate companies with strong balance sheets. The strength in tech companies may indicate a search for growth even if there is tepid broad economic growth overall.
Technology is where change really is, with new business methods disrupting almost every industry along with profit metrics. Sharp-eyed money managers are looking for companies with management teams and business models that can lead change and prosper from creative destruction long before traders respond to earnings increases.
Markets will continue to be volatile and periodic pullbacks are to be expected. Unemployment data is stable and wages are growing at the best rate since 2009. Most observers feel that the bull market still has legs and that equity investors, while many look for reliable dividend streams, will also be seeking quality earnings growth. Diversification should balance value and growth portfolios.
It’s safe to say that you can enjoy your summer. Take a relaxed and fun trip, turn off the television and silence the news feed on your mobile devices. The sounds of the sea are preferable to noise and static from MSNBC! Stand on a mountain top and suck in fresh air. Sometimes the best portfolio strategy is to ignore it for awhile!
Lewis Walker is a financial planning and investment strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. This information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. There is no guarantee that any opinion or suggested possibility will happen.