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So, what will happen?
That’s the question on a lot of people's minds as the final election day nears. I think most people have the same idea as to what may happen if Trump gets elected… Ie. The stock market will likely continue to fall (as it has for the last seven days). But I’ll try to put the potential fall into context for us, as investors.
I think the majority opinion in this case, is accurate, and it’s very likely that volatility will increase substantially. Remember the market is not a fan of change, and Trump is definitely a big change. He is untested, and therefore, nobody really knows what to expect.
The market has already increased greatly in volatility. If you look at the VIX (CBOE Market Volatility Index) you can see it has especially increased over the past nine days.
(Source: TD ThinkorSwim)
Trump is likely to cause great uncertainty in almost every aspect of his presidential administration; in tax reform, central bank regulation, defense plans, and the economy overall.
There is potential for a decrease in both exports and imports as Trump wants to rework various free trade agreements (FTA). Trump’s protectionist tariffs on imported goods will result in higher costs, some estimates say we could see an increase of as much as 3% on cost of goods for the average American. On the flip side, Trump’s Made in America strategy (his policies designed to increase domestic manufacturing, thus creating jobs) could actually increase exports IF (and this the kicker!) the goods are cost competitive, that being said, let's not forget we live in a world economy.
If Trump imposes high tariffs on imported goods that were once protected by a FTA, you had better bet that other countries will not sit idly by - they will do their very best to ensure that their goods are being exported and consumed regardless of a foreign nation's domestic policy. The net effect of his economic plan will depend on the changes made to free trade agreements, and the reaction of other nations to those changes. Could we be on the edge of a trade war? Time will tell.
If you find this all fascinating, here are a couple of articles you might want to read:
If Trump gets elected then we really are in uncharted territory, and as we know, the markets don’t like changes. The short term market reaction will result in a significant drop in prices. The length of time we can expect this to last will depend on how long it takes Trump to follow through on his election platform.
If he follows through on his plans, America will come out of the recession potentially much stronger than it was before, and we could enjoy another bull market run. Either way, if we see a drop, it will recover again.
Why I’m hoping Trump gets elected
Stocks, and the market overall, are expensive. Like seriously expensive. Look at the Shiller PE ratio:
(Source: Shiller PE)
It’s currently sitting at 25.72. This is high. To put that into perspective, the market median, going all the way back to 1880 is 16.05. This tells us we’re in expensive territory.
I selfishly want Trump to get elected for two reasons:
The market will likely fall now, rather than later, giving us less time to wait to for a pull back, and letting us put our cash to work.
Long term, I think Trump would be beneficial to the Stock Market due to the decrease taxes on businesses, which should help increase profitability over time.
(Read more about Trumps potential here).
Warren Buffett's Indicator
Another metric I like to use is Warren Buffett's favourite indicator which takes: the stock markets, market cap divided by the US GDP. Buffett says ‘For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%--as it did in 1999 and a part of 2000--you are playing with fire.’
Today it’s hovering around 124.9%. Take a look:
(Source: Advisor Perspectives)
As you can see, we’re well above that 80% level guideline, which means it’s also showing that the market is still overpriced. It’s not as overpriced as it was in the DotCom market bubble of 2000. And it’s not as expensive as it was in Q1 2015, but none the less, it’s still not a great time to be a buyer.
Potential opportunity
As investors, we have to see drops in the Stock Market not as something to fear, but something to relish… It’s our opportunity, to buy something we like, at ever more attractive prices. And that, to me, is where the real money is to be made.
If Trump we’re to get elected, I think there will be better opportunities for us to put our capital to work. If his election does cause a market drop, we can expect some of those wonderful companies we’ve had on our watch list, to go on sale.
Now if you continue to watch those two key indicators for the overall market value, you’ll likely see them drop if Trump does get elected.
Sidenote: I’d add both those indicators to your favourites bar and check back to them whenever you’re thinking of buying something. It can give you a great snapshot of the value of the Stock Market at that moment in time.
The best thing you can do is get ready for the drop and to have companies on a watchlist, that you would love to buy. Wait until they are selling for a large margin of safety, then buy to your heart's content. Then hold for as long as possible. Warren buffett said the best time to sell a great company is NEVER. But in reality, you’ll likely sell after the market has rebounded, and irrational exuberance sets in, letting you sell when they are overpriced again.
Then we rinse and repeat, and slowly become very wealthy.
That’s my quick and dirty look at the market today, and the potential opportunity that a Trump as president could present. Let me know what you think!
We’ll talk again soon,
~Ryan Chudyk~
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