Buy the Election – Sell the Inauguration?

rumorThis has been the mantra lately from many in the media. What it refers to is an old stock market idiom of “Buy the rumor, sell the news”. This is most commonly associated with, for instance, buying a stock based on the rumor of it’s inevitable takeover. In turn, one should then sell it when the news hits, not waiting for the deal to be completed.

The reason that US stocks have done so well since the election surprise is that
they must be ready for breather. It makes sense.

However, there is another market idiom which I more so trust. It is “If it’s obvious, it’s obviously wrong!” With the new widespread belief being to sell the inauguration, I’ll take the other side of that bet. There is no technical or fundamental analysis for this decision. Just 32 years of doing this for a living.

For that matter, there is no way to apply any of the normal financial planning techniques and metrics going forward because US stocks are rising solely on the anticipation of Trump’s spending promises.

Investor Strategy

The new “fiscal” policy certainly has everybody excited, but what impact will it have on the economy and financial markets? Of course, we will benefit from lower taxes and regulation. For the most part, investing in the next few years will be very different than the last few years, so put a plan in place to Trump up your portfolio!

Select sectors of the stock market should do well under the new fiscal policy, but not all, so be very diligent how you build your portfolio. With interest rates set to rise and inflation to pick up, treasury bonds are out. That creates a huge challenge for investors to have a portfolio that participates when the market goes up but doesn’t get killed when it goes down. Work closely with your retirement advisor to make sure you are positioned correctly to get the best returns with the least risk possible.

I continue to be concerned with the serious demographic challenges that lie ahead. The 90 million baby-boomers are now past their spending years and the 65 million Generation X-ers can’t possibly create the same purchasing power. It’s not until the 85 million echo-boomers, the kids of the baby boomers hit their peak spending stride in 2023 will things truly turn around.

I applaud Trump’s plan to spend money, but we have seen this strategy before with Japan. I devote a whole chapter to Japan’s tireless effort to revive their economy in my new book: Surfing the Retirement Tsunami – Your guide to staying afloat and retiring comfortably.

Japan has tried a combination of fiscal and monetary policy for 25 years to no avail. The bottom line is that an economy simply needs more consumers to grow – something that none of the developed countries will have for at least the next 5-7 years. Luckily, we have much better demographics than Japan.

President Trump’s economic vision calls for deep tax cuts for businesses and individuals and at least $1 trillion in new spending to rebuild roads, bridges and any other of America’s crumbling infrastructure. Many people are calling this Reagan 2.0. Obviously, this will result in higher debt and budget deficits, though the new President insists that increased economic growth will pay for all of this.

The problem comes down to the country’s debt problem. When Reagan took over, the U.S. debt was a fraction of what it is today. As bond guru’s

Hoisington Management

 wrote in their post-election update:

The economy is extremely over-indebted, turning even more so this year. In the
latest statistical year, debt of the four main domestic non-financial sectors
increased by $2.2 trillion while GDP gained only $450 billion. Debt of these four
sectors (household, business, Federal and state/local) surged to a new
high relative to GDP. This will serve as a restraint on growth for years to come.
Also, the economy is in an expansion that is 6 1/2 years old. This means that
pent-up demand for virtually all big ticket items is exhausted – apartments, single
family homes, new vehicles and plant and equipment. Rents are falling as a
result of a massive apartment construction boom. Reflecting a huge stock of new
vehicles and significant easing of credit standards, the auto market appears
saturated. Vehicle sales for the first ten months of this year have fallen slightly
below last year’s sales pace. New and used car prices are down 1.2% over the
past year. The residential housing market appears to have topped out even
before the sharp recent advance in mortgage yields, which will place downward
pressure on this market.

Even if the new policy is successful, it will take several years to see and feel the impact. Hopefully we can get stocks to go higher in anticipation of future growth but with rates staying low because we are still in a slow growth deflationary environment until 2023.

Most importantly, every portfolio should be tactically hands-on managed, never buy and hold, or what I like to call buy-and- hope. Be sure your retirement advisor/portfolio manager is using all 6 asset classes: stocks, bonds, commodities (including gold), real estate, international and cash. Not just one or two. This is the way to achieve your objectives and the get the best returns with the least risk possible.

As always, please feel free to contact me.

Cheers – Keith

916-925-8900

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