The market has had a nice run during the Biden administration. Will it follow suit after Trump takes over?
As we all know by now, the stock market during the past four years blew by Donald Trump’s prediction during the 2020 campaign that if Biden won, “the market will crash like you wouldn’t believe.” As things turned out of course, the stock market had a stellar four years (albeit interrupted by a selloff, aka ‘healthy correction,” in 2022) during the period between Biden’s election in 2020 and now.
Depending on what index you choose to follow, the market gained something close to 48% over the course of Biden’s watch, with part of that coming during the aftermath of Trump’s victory last month. Even ignoring the recent “Trump bump,” investors enjoyed one of the most productive 4 year periods I can recall.
Having spent more than a decade making markets on the trading floor of the Chicago Board Options Exchange and another decade brokering commodity futures here in South Dakota, I’ve traded through a lot of market cycles, and I can say unequivocally that this was one of the best ever, especially when you consider that we had to deal with the Covid freakout that came to pass during Biden’s tenure.
So now that we’re about to say sayonara to Biden, how do the market’s prospects under Trump look from my old-time trader’s perspective?
Answer: Not so hot. It’s not that I’m particularly bearish on the market, it’s just that things look muddled at this point as Trump keeps coming up with predictions and policy initiatives that will take us in sharply new directions when it comes to immigration and trade policies. The uncertainty is made even more acute by the fact that inflation just hasn’t quite gotten down to a level that can substantially reduce interest rates, which is what the market really needs to keep moving along the upward arc that started 4 years ago.
Even Trump himself is beginning to waffle on his campaign anti-inflation pledge to make prices “come down fast”, saying it will be “hard” to do so. That switcheroo is a signal that Trump knows prices will probably remain naggingly high for a long stretch. If that happens you won’t see interest rates falling back to their pre-Covid levels any time soon. That’s why I just don’t see the stock market sustaining its upside momentum in that kind of sluggish inflation/interest rate environment.
As to mass deportations, with our already tight labor market keeping labor costs high, I don’t get how suddenly deporting millions of undocumented workers (emphasis on the word “workers”) will alleviate the problem. More likely it will aggravate it.
Then there are those tariffs. Last week the Congressional Budget Office, as quoted by the U.S. Senate Budget Committee, said Trump’s tariffs “would make consumer goods and capital goods more expensive, thereby reducing the purchasing power of U.S. consumers and businesses.”
Again, these potentially inflationary initiatives don’t seem like they’d be friendly to stock investors. Based on stock prices relative to corporate earnings, markets are historically high right now. Last week, Investor’s Business Daily headlined, “the S&P 500 is overvalued.” It quoted an analyst who was essentially repeating what market followers already know, namely – and forgive the technical jargon – that the market is yielding less than intermediate corporate bonds. In short, S&Ps are trading at 25 times its earnings, about 20% higher than where they should be.
There is, of course, a rub. Overpriced markets can continue to go higher, so if you’re inclined to stick with a market position for the long haul no matter what, my observations shouldn’t mean much to you.
If you’re inclined to adjust your portfolio as political and economic conditions warrant, this is the time to do it. Whether you agree with me or not, the points I address should be considered.
If you’re inclined to be a trader and you too share my concerns, it’s good to remember a dictum stated by legendary economist John Maynard Keynes: “Markets can remain irrational longer than you can remain solvent.”
With that in mind, I wouldn’t be surprised if the Trump rally, irrational as I think it is, has legs.
My take though, is that the market has gotten ahead of itself and is probably overdue for a breather. Does that mean I’d abandon it altogether? Of course not. I’ve spent a professional lifetime admiring the resiliency and the steady course of the American stock market over the long haul.
Right now, though, as we wait to see how Trump’s policies play out once they’re in place, it’s probably prudent to evaluate how much weight portfolios should put into stocks as asset allocation decisions are being made for ‘25.
John Tsitrian is a businessman and writer from the Black Hills. He was a weekly columnist for the Rapid City Journal for 20 years. His articles and commentary have also appeared in The Los Angeles Times, The Denver Post and The Omaha World-Herald. Tsitrian served in the Marines for three years (1966-69), including a 13-month tour of duty as a radioman in Vietnam. Republish with permission.
