The title in Jim Cramer’s blog sums up the current market environment, “It Has Never Been This Good”. This title might actually be an understatement given the market returns over the past year and the markets refusal to fall more than 1%. I wrote a blog immediately after the election titled, President Donald Trump: Game changer. My outlook was that the Trump presidency would increase the level of risk in investors’ portfolios, but also the potential for higher returns.
Cramer’s blog summarizes the current rally well, “I can’t stress that this takeaway is like dry tinder for whatever is thrown on to it — lower corporate taxes, increased bonuses, repatriated capital, rising commodity prices, increased auto sales, more technology spending, new pipelines, less regulation.” President Donald Trump gave an interview on Friday from the World Economic Forum in Davos and he thinks that the U.S. GDP growth rate could reach 4%. He went on to say that the cut in regulations are just as big as the tax cuts. If U.S. GDP surprises above 4%, then stocks may still be undervalued.
I continue to believe that the Trump presidency has increased the level of risk in investors’ portfolios, but also the potential for higher returns. As market valuations continue to rise, so does the potential for loss. I explain to my younger clients that this bull market might not be the best for them over the long-term. As an investor, you would rather have prices lower and rise after you have accumulated wealth and are closer to retirement. Future returns could be diminished in the years ahead because valuations are at the high end of historical averages. If these record stock prices are supported by much higher corporate earnings, then all of those investors waiting for a correction will continue to be disappointed.
Many financial advisors employ gimmicky sales tactics, such as showing past performance or presenting sales and marketing literature showing 20% returns. I do my best to educate my clients and not sell them on historical performance. I help my clients make decisions based on the potential for returns given the level of risk in their portfolios. We are entering a period in the market cycle where investment risk for houses, stocks, bitcoin, cash, preferreds, bonds, Euro’s, Yen, oil, and about every other asset have never been so high. High asset prices are the mark of President Trump’s new economy. There is a potential for high returns, but there is also substantial risk if U.S. GDP does not meet President Trump’s lofty expectations.
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