Should You Be Worried With Trump's Market Highs

Marshall Rathmell |

I had a couple come into my office recently that are potentially going to become clients. He and his wife are retired, in their 70s, and have about 95% of their investments in fixed income. I shared with them that this was not a good strategy for people of their ages and with the lifespan they apparently had.

They had sold all of their equity assets during the great recession, in 2008, and were waiting to see what effect the Trump presidency would “do” to the market. I suspect there are many other people also “waiting to see what happens”.

Without belaboring the point, their waiting since 2009 has caused them to miss out on a very significant bull market. (On the other hand, there is a name for what they are doing: “market timing”. Market timing is not considered a good strategy for most people.) By some measures “the market” is high, or overvalued. By other measures, priced about right. There are probably some measures by which it is undervalued.

In fact, some people are expecting the market to tumble into a bear market. Consider that historically, the market has fallen 30-50% once every three to five years. That’s just history. But what other history can we learn from?

Looking at the drop within a given year, from high to low, the average drop is 14.2% (from 1980 through September 2016). Figure 1, from JP Morgan Asset Management, shows the year by year) intra-year drop from highest to lowest point, indicated with red dots. It also shows how the year ended (in grey bars). So, we see that almost every year has significant drops in it. But, be sure to notice that in 27 of those 36 years the market ended with a gain.

Figure 1 Market Intra-year Downs

Now let’s look at what has happened, in the past, when new presidents entered the White House. Figure 2 shows the worst stock market drawdowns for every president since Herbert Hoover in the 1930s, and you can see that good president or bad, Republican or Democrat, they all eventually experienced significant down markets. Some people might be surprised to see Ronald Reagan’s 25% and 33% drop from high to low, or the nearly 52% drawdown experienced during George W. Bush’s presidency. Weren’t these pro-business Presidents?

What the chart doesn’t show, but you know already, is that after every single one of these scary drops, the markets recovered to post new highs, which we’re experiencing today. So don’t listen to anybody who talks about “if” the markets are eventually going to go down sometime in the next four years. We’re going to experience a bear market—time, date, duration and extent unknown. And then, if history is any indication, we’ll see new highs again eventually.

You’re likely starting to hear people talk about “if” there’s a bear market during the Trump Administration, when the real truth is they should be talking about “when.” And it won’t necessarily be triggered by a poorly-worded tweet, a global-trade-stopping new tariff regime or tax and entitlement reform. Every presidential cycle has its share of market drawdowns, seemingly regardless of presidential policies.

Figure 2 – Presidential Term Market Drawdowns



-Harold Sasnowitz-