We think that stocks in Trump’s current term will fall short of Obama’s gains, mostly reflecting a valuation starting point that’s almost twice as high as Obama’s was. “Managing expectations” doesn’t seem like Trump’s style, but in the case of the stock market it might not be a bad idea.
YTD the S&P 500 has fallen 2% while the S&P 500 Banking industry group is down over 12%—a shortfall that has the attention of value investors and contrarians seeking a chance to buy high-quality banking franchises at fire-sale prices.
While the past several months’ reversion in valuation measures has certainly wrung some of the risk out of the market, if the bear market reasserts itself and drives stocks to valuations seen at average cycle lows, downside risks are still substantial.
Relative valuations of Staples and Utilities sectors already reflect a “flight to quality” effect. Investors looking to add some economic/stock market defense should focus on the cheaper Health Care groups.
Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.
We’ve been correctly positioned near our tactical portfolios’ equity minimums, yet we’re oddly compelled to use this month’s “Of Special Interest” section as a very public second-guessing of that move.
We’ve long argued that this tightening cycle began in January 2014, the month of the first of seven tapering moves which occurred through October of that year. There’s both economic and market evidence to back up this claim.