There is a lot of talk lately praising the strong upward rally of the markets. Of course, the DOW Jones famously topped 20,000 for the first time ever in January. In addition, there have been many stories of a “Trump rally” occurring in the markets the past few weeks.
It certainly is tempting to jump on this bandwagon and assume that all is well in the markets. Who wouldn’t want to embrace the news of surging markets, especially after the extreme contraction of markets following the 2008 financial crisis? Well, I hate to be the bearer of bad news, but all of these upbeat forecasts of the markets may be a bit premature.
Let’s begin with the DOW breaking 20,000. This is an impressive milestone, and one that the Trump administration is priding itself on. Indeed, a portion of this rise can be attributed to Trump; the DOW rose by 1,900 points from November 9th through December 20th of 2016.
However, credit for hitting the 20,000 mark cannot be fully given to Donald Trump. The markets were already bullish by election time, riding off of strong growth fostered by the Obama administration. Indeed, even the ultra-conservative Trump-leaning publication Breitbart, the publication of Trump’s current Chief of Staff Stephan Bannon, admits that “the Dow has climbed throughout the Obama era, breaking new records regularly in a long ‘bull market.’” While Mr. Trump may have been the one to ultimately break the mark, it was the Obama administration that brought him to the doorstep of this accomplishment.
What’s more, when we delve a bit further into the growth of the DOW under Trump, we notice some unsettling revelations. On election night, as it became clearer and clearer that Trump would be the next president, the DOW dropped 900 points. 900 points on that one single night. Now, the markets did rally back, combating that massive drop with a massive upswing.
The DOW officially broke 20,000 on January 25th. Several days later, President Trump announced his plans for a travel ban. Following this announcement, the DOW proceeded to fall back under the 20,000 mark.
What these two examples illustrate is the increasingly unpredictable wild swinging of the DOW under Trump. While it has managed to sustain upward growth, that growth has been characterized by a lot of significant rises and falls, as opposed to a steady upward trajectory.
Basically, the markets are very uncertain. While they may seem bullish and strong right now, we never know when the next 900 point drop will be.
Don’t take my word for it though. According to data from Bloomberg, the number of news stories containing the word “uncertainty” have risen sharply to a new record high since Trump took office.
Large amounts of cash have also been pouring into gold recently. Gold has traditionally existed as a hedge against uncertainty in the markets, and as such, when more people are buying gold, it generally indicates greater uncertainty among investors.
Prominent economists are recognizing this growing uncertainty as well. Alec Phillips, of Goldman Sachs Group Inc., noted that while there was a lot of positive sentiment among investors directly following the election, “One month into the year, the balance of risks is somewhat less positive in our view.”
He notes several reasons why this may be happening. One major reason is the stronger-than-ever partisanship of Capitol Hill following Trump’s victory. While Republicans do control the presidency, the Senate, and the House, the strength of partisanship on Capitol Hill is troubling.
What’s more, Trump’s actions in the White House as of yet have given investors mixed feelings. Directly after his election, investors were feeling good about the future, hoping that Trump would focus heavily on boosting the economy through such mediums as rolling back regulation, implementing sweeping corporate tax reform, and introducing new fiscal stimulus. While he has done some work in these areas, such as his recent executive order which requires two regulations be removed for every one new regulation implemented, many investors feel he should be focusing more on the economy and less on other issues.
Immigration and trade are two issues on which Trump has focused his first few weeks as president. He proposed a travel ban to several Middle Eastern countries last week. Mr. Trump has also backed the U.S. out of the Trans-Pacific Partnership, a free trade agreement among several Pacific Ocean nations, including China. He has also stated that he plans to renegotiate NAFTA at some point in the near future.
This focus on immigration and trade is leaving investors feeling wary for two reasons. One is that they would like for President Trump to focus more of his time on economic issues as opposed to trade and immigration. The other concern is that his trade efforts may have a negative impact on the economy. His proposed 20% tariff on Mexico is already raising alarms. What’s more, his proposed 45% tariff on China has many economists talking about the possibility of an all-out trade war between the two nations. Forecasts like these have made investors very worried.
The markets have been growing since Trump won the election. There is no denying that. However, uncertainty among lay investors and distinguished economists alike is also growing. While things are looking positive today, it’s difficult to pin down what Trump will do next, and this makes for a difficult investment environment.
For those who are feeling uncomfortable with the uncertainty of the U.S. markets, there are other options. Investing outside of the U.S. is an excellent way to hedge against uncertainty. What’s more, an investment into a hard asset, such as a rental property or productive land like a plantation, is an even better way to hedge one’s investments against wild uncertainty in the markets.
If you have investments in the DOW or a similar market and have seen your investments grow since Trump’s election, you certainly have the right to enjoy your gains. If you’ve got your head in the clouds, however, and think that your investments will never come down, you should rethink your investment mindset.
Remember the old adage, “If it seems too good to be true, it probably is.”