Trump Boom or Trump Bubble? How to Cash In on the Rally Either Way
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If you're a big fan of President Trump, you probably think we're in the early phases of a terrific Trump boom. And if you can't stand him, you're probably worried that we're in a Trump bubble that's about to pop.
There's some solid logic on both sides of the equation. U.S. stock mutual funds, which tend to attract individual investors, have drawn more than $77 billion into since November -- a big change from the previous 12 months, when investors pulled out $67 billion, according to Morningstar. Yet the investing math behind rising stock prices has long suggested that the bull market may not have much more room to run.
Either way, though, don't be too quick to put your money where your politics are. Whether you're bullish on the Trump presidency or bracing for the worst, here are some reasons to pause before upending your portfolio -- and one smart move you can make right now.
If You Think It's a Trump Boom ...
A political neophyte, Trump ran on his business record. He's followed up by stocking his administration with business executives, from Rex Tillerson at State Department to Steven Mnuchin at Treasury to Wilbur Ross at Commerce. Meanwhile, his economic program contains planks businesses love, such as his promises to slash regulations and cut taxes.
But no matter how jazzed you are about the new tone in Washington, there are some reasons to be cautious.
Although Trump's predecessor didn't stroke the egos (or wallets) of business people, stocks did pretty well under Obama, too. So stocks were trading at unusually lofty prices relative to corporate earnings -- about 26.5 times average annual profits for the last decade, compared to a long-term average of just 16.7 -- even before Trump took office. (The Trump rally has driven them even higher, to 29.8 as of the end of February.) Even if earnings really do improve dramatically, stock prices might not rise that much.
And it remains to be seen what the first-time office-holder will ultimately accomplish. Take the proposed corporate tax cut, which could boost earnings by 20% or so, making stocks look cheaper. Stocks hit new highs after Trump mentioned it in his speech to Congress on March 1. But Trump has also told supporters he won't be able to deal with tax reform until after overhauling the nation's healthcare system -- something that won't be easy, given the initial reaction to the Republican plan. And Washington politicians have been talking about corporate tax reform for a long time without anything getting done. (Here, for instance, is President Obama's plan.)
While Trump will have the advantage of having allies in charge of Congress, House Speaker Paul Ryan has his own plan, and it looks nothing like Trump's.
If You Think It's a Trump Bubble ...
Of course, many investors won't need to be convinced that the new president will face obstacles when it comes to his promises of unleashing economic growth. And, indeed, some of the White House policies that bullish investors appear to have overlooked -- like moves to curb immigration and significantly increase the deficit -- could hurt, rather than help, the economy.
These shortcomings have critics warning of a "Trump Bubble."
But you should be just as wary about bailing out of the market as they should about piling in. For one thing, just as a pro-business president is no guarantee the market will rocket ahead, it's also a mistake to assume stocks will plunge under a divisive one. It's true stocks did especially well during the confident, peaceful Eisenhower (10.4% average annual gain) and Clinton (15.9%) years. But they also logged steady, if not spectacular, returns (5.3%) during the tumultuous Johnson era.
Then there's the matter of valuations. It may be tempting to predict the market is due for a reckoning. But remember forecasters have been warning of a pullback for several years now. So far neither those predictions, nor ones that the market would plunge on Nov. 9 if Trump won, have been borne out.
The truth is tha the market can drift at rich valuations for years at a time. The S&P 500 traded above its long-term historic norm all the way from 1991 to 2008 before values finally, sufficiently, tanked during the financial crisis.
So What Should You Do Now?
No matter what your ideological views, most financial advisors say investing should be about tuning out emotional distractions -- especially politics. For that reason, say financial planners, the one smart move to make now -- if you do anything at all -- is the same one you'd make during any bull market: Judiciously trim back your fast-growing stock portfolio, while adding to your bonds to "rebalance" back to your investment plan's long-term mix of risk and reward.
If you've stuck to your investment plan over the past year, chances are the Trump rally has increased the value of the stocks you own far more than the value of your bonds. For instance, a portfolio that stood at 70% stocks and 30% bonds in March 2016 would be now be at roughly 73% stocks and 27% bonds. Trading -- in this case selling stocks -- can capture those gains and bring your investments back in line with their original plan.
In the long run, rebalancing can lower your portfolio's volatility, without significantly hurting your investment returns. The trick is maintaining discipline, says Houston financial advisor Jonathan Swanburg.
"I find there are an almost equal number of people itching to buy more stocks and others that want to bail out," he says. "For both I remind them that emotions don’t matter. Your financial plan is the only thing that counts."