"Markets in the Trump Era"

Sydney M. Williams

Thought of the Day

“Markets in the Trump Era”

February 13, 2017

“Wall Street people learn nothing and forget everything.”

                                                                                                Benjamin Graham (1894-1976)

“It has become appallingly obvious that our technology has exceeded our humanity.”

                                                                                                Albert Einstein (1879-1955)

Investors get what they want (deserve?) from market pundits. If one is bullish, an expert is found who concurs. If one is bearish, a market seer will be uncovered. But the future is, at best, a guess. We can look to the past for guidance, but none of us are clairvoyants, especially in this “brave new world.”

The two decades that ended in 2000 were some of the best in stock market history, with the Dow Jones Industrial Average compounding at 14.0% over those twenty years. Since, the Average has compounded at 3%, a consequence of a difficult first nine years, followed by a big bounce off the 2009 lows. Multiples are high, but the euphoria of the late 1990s is gone.

Markets are deciphering what is happening globally, geopolitically, economically and technologically. One thing we do know is that the past few decades have not been good for large segments of the population. Since 1970, on an inflation adjusted basis, stocks, including dividends, have compounded at 4.3% and home prices at 2%. However, median incomes have compounded at only 0.5%. In the past ten years, these variances have widened. Since 2007, stock prices are up 60%, median house prices are up 30%, while median incomes are unchanged. Incidentally, over the last decade college tuitions have risen 40%. Labor force participation, over the last decade, declined four percentage points – a cost of six and a half million fewer jobs. Working Americans, who find dignity in what they do, are understandably upset.

There are many reasons for their angst: Immigration policies have let in cheap labor. Globalization has provided benefits to consumers, but at a cost of jobs. Politicians have provided entitlements to the nation’s poor and have focused on pet projects for the wealthy (like solar panels and Teslas), but have ignored the plight of the American worker. A politically-driven fixation with environmental issues has come at the expense of economic growth. Complex tax and regulatory rules have helped rich individuals and big businesses, but have hurt small companies and caused a net decline in new-business start-ups for the first time ever. And a technology boom, equal to the Industrial Revolution in impact, has obsoleted jobs.

There are still other reasons for their concern: Social Security and Medicare are at risk; an absence of defined benefit retirement plans and an aging population mean that millions are retiring without the ability to support themselves. The moral values that most Middle-American families grew up with are dismissed by coastal elites. Public schools cater to unions, not students and parents. Low interest rates have helped speculators, but have hampered savers. And, of course, 9/11 exposed a vicious and and different enemy – Islamic extremism – an enemy Obama’s Washington was unwilling to call by name.

Is there a way forward? Yes. There are things government should let alone, but there are steps they can take. Among the former is: Don’t impede technology, even though change is taxing, especially to the age-challenged. When Einstein uttered his famous quote, he was thinking of the Atomic bomb, but his words apply today. Robots have replaced factory workers and algorithms have replaced Wall Street traders. Doctors in Houston, using robots, can perform surgeries in remote New Hampshire towns. Hoteliers can deliver room service using robots. During the holidays, as many shoppers bought gifts online as went into stores – good for consumers and a blessing for truckers, but bad news for store clerks. And, when Drones and/or self-driving vehicles drop packages on our doorsteps, delivery drivers will be affected. Wireless communication has had a negative impact on copper producers and linesmen. Approximately 30% of the roughly $100 trillion in U.S. equity and bond markets are now managed passively, reducing management fees by perhaps $150 billion. MOOCs (Massive Open Online Courses) are changing the way we learn. Joseph Schumpeter’s “creative destruction” is affecting multiple sectors of the economy. And, such changes have a draconian impact on labor. Snapchat, Instagram and other forms of social media mean that we are, for good or bad, continuously connected. In the military, Drones are doing the jobs of manned aircraft and “boots on the ground.” Through our smart phones, we are trackable. But the internet also allows terrorist organizations to recruit and plan operations anonymously. Do we understand the full consequences of this revolution? I would guess not, but we cannot discourage innovation.

We must also be careful not to raise barriers to trade, a critical ingredient to global growth. We cannot retreat into a shell, to quit the world of which we are its most integral part. We must not lose sight of our responsibilities as a compassionate nation, but we must not be so naïve as to ignore evil that lurks. We have a responsibility to ourselves and our allies to be militarily strong. We should be the principal proponent of global trade that is fair to our workers.

But we can make this disruptive transition easier. We can ease regulation for those willing to start new businesses. We can reduce red tape, without forfeiting safety. We can make our tax code less complex and more competitive. We can legislate tort reform, without harming plaintiffs. We can improve schools by giving parents and students choice. We can limit government spending, by fixing run-away entitlements, which should allow moneys to be spent on infrastructure without ballooning debt.

As for markets, the Dow Jones Averages are up 10.5% since Mr. Trump’s election last November – a significant down payment on future policies. Despite protesters and the ridicule Mr. Trump receives from mainstream media and his Democrat opponents, risk markets seem unworried[1]. The spread between investment grade corporates and high-yield bonds has narrowed since the end of 2016’s third quarter from 284 basis points to 216 basis points. The VIX, a measurement of volatility, closed at 18.74 on November 8, and at 10.85 on February 10. And, during only one day out of the 67 trading days since the election has the market moved up or down more than 1.5 percent. There is, however to this oldster, something unsettling about complacency in markets, which brings to mind Benjamin Graham’s warning.

Mr. Trump, regulatory and tax reform should be first on the agenda.

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[1] Investors have exchanged riskless for risk, with the yield on the US Ten-Year having risen 25% since November 8.