Wednesday, January 18, 2017

Stock Market Correction Starts Inauguration Day

The S&P 500 is up 232% since March 2009. The index is up 8.7% to 2267 since the Nov. 8, 2016, election of Donald Trump over Hillary Clinton. The rally was quick and fast. Investors were optimistic a businessman in the Oval Office would spur the U.S. economy, increase corporate profits and create jobs.

The rally is over for now. We will not see Dow 20,000 in the near term. We will likely see a correction in stocks, probably starting on Friday on Inauguration Day. I expect this correction to be around a 10% decline, wiping out all the gains since November. Why will this happen? Longtime investors know that the stock market is fully valued by most measures. The S&P 500 is trading at a 26 Price/Earnings Ratio, substantially higher than the average of 15. Many quality stocks hit new highs in December and January, but haven’t produced record earnings.

Financial stocks hit record highs in December and January, but are banks doing anything different? I asked one banker why his bank was worth 15% more today than on Nov. 8? He said, “We are doing the same thing today as we were doing yesterday,” he said. “We haven’t changed a thing.”

All of this Trump exuberance was tempered when Trump held his first press conference last week. It was extremely painful to watch. I had never heard a president come down so hard on the press. “Buzzfeed is a failing piece of garbage,” Trump said. When CNN’s reporter asked a question, Trump said, “Not you, your organization is terrible. You are fake news.

That press conference was a wakeup call. It shows how difficult Trump will be as a leader. Protests are growing against Trump. Some Clinton supporters still will not call him their president. She won the popular vote, but he got the Electoral College support.

It is obvious Trump is an outlier. He is a tough negotiator, he usually gets what he wants. He might be able to save taxpayer money on military weapons. He already said he would like to negotiate better terms for fighter jets. Trump says his top priorities are corporate tax reform, job growth, immigration and health care. These are immense challenges. A Republican president and a Republican-led Congress should be able to work together to get things done. But will they? We really don’t know until we see their actual accomplishments.

Does this mean investors should get out of stocks? No. Not necessarily. I’m staying in. I’m taking all dividends in cash and leaving the cash on the sidelines and not reinvesting.

We will soon know how well Trump performs as president. In the meantime, I am prepared for a selloff in stocks. It is quite possible the correction will be fast and furious with a quick rebound. For those staying in the market, hold on tight, we may be in for a wild ride. If Trump can prove that he can run the country and grow the economy, the stock market will eventually rally to new highs. But if Trump fails to lead, the stock market may not recover and the US may enter a recession. 

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