Beware Of Market Tops And Trump’s Race For Stock Market History

We want to add to our last post because we believe the topic is of immense importance to the younger generations starting to save and plan for their retirements.   Note, we had a slight error in the post,  Keeping Stock Market Returns In Perspective, on the annualized return for President Obama’s S&P due to the wrong start date.  We have made and noted the correction.

We doubt many caught it but glad we did before say, Fox News, as they may accuse us of searching and cooking up fake market conspiracies to hurt President Trump, politically.  God forbid that ever happens in this great country.

Beware Of Buying Tops 

Let of preface by saying that we do not, nor does anyone else know the future or can say if stocks are topping high valuation levels with absolute certainty.  We have no idea if stocks are going to go down 50 percent over the next few years or rise by 1,000 percent over the next ten years.  We can only look at history and logic to try to estimate the probabilities.

If you have been reading GMM over the past few years, you know we come from a trading background and our brains are not wired like long-term investors, who work, save and allocate their savings to say a 60/40 percent to a diversified portfolio of stocks and bonds and live their lives, watching the markets on occasion.   Trading and analyzing the markets and the global economy has been our life 23/7 1/2 for most of our professional career.

We do recognize, however,  there are very few exceptions in an investor’s life, which should deviate from the above discipline and believe the current environment is one of these times.

Valuations 

Almost by any measure,  the U.S. stock market is extremely overvalued by any historical measure.

Dot.com Giddiness

We are also starting to see the same sort of giddiness experienced that was experienced at the top of dot.com boom, canonized by President Trump’s current chief economic advisor, Larry Kudlow, infamous quote in February 2000,

“This correction will run its course until the middle of the year. Then things will pick up again, because not even Greenspan can stop the Internet economy.”  — Larry Kudlow, Feb 2000

The Nasdaq was in a bit of a slump as of that quote but then rallied to its near-term peak on March 10, 2000, and preceded to fall 74 percent before bottoming in October 2002.

If you had bought at the March 10th top just after Larry Kudlow’s pronouncement and even held the index until Friday’s close, the annualized return of  2.83 percent would have underperformed rolling a 6-month CD over the time period.

Yes, we are cherry-picking Mr. Kudlow’s call and you kind find many of ours in this blog over the past nine years.  The only people who get right 100 percent of the time are liars and we can think of a few big ones.

Stock Market 101

We were so concerned about the dot.com bubble sucking in the “crowd” and many of our friends at the top,  we felt obligated to teach a class Stock Market 101 at our local community college just after Y2K.  The class was overflowing as many signed up simply because they felt stupid about being left behind and watching their friends get rich.

In our first class, we showed a documentary about Charles Ponzi.  About halfway through the semester,  Apple announced disappointing earnings just before our night class and I came in and announced to the students that Apple’s stock was down 50 percent since the close in the after-hours trading.  I could see the blood draining out of many of my student’s faces as, no doubt, they had loaded up at the top.   Holding would have been a good decision in hindsight or, better yet, having some capital to pick it up 50 percent cheaper would have been nice.

Calling Tops 

Calling exact tops is a mug’s game and is truly impossible.  For example, earlier in the year we began selling and setting up some shorts in the S&P at 3025, which worked for us a few times but we were eventually forced to cover at 3125 for a loss, but not a catastrophic one.

Who knows where the market will go from here but given valuations, we don’ think there is much runway left.

Housing Bubble Example

I sold my oceanfront house at the end of 2004 having zero doubt the country was in a massive housing and credit bubble.  It had appreciated 200 percent in just over eight years.   My real estate broker, who told me I was paying too much when we bought it said I was crazy to be selling.  We didn’t use her on the sell, by the way, and did a private transaction with the buyer saving $100k in brokerage commissions.

Prices continue to rise for another year and many of my friends, who had just bought in,  mocked me with a bunch of  “I told you so’s.”

I never wavered and knew it was just a matter of time and even began shorting Golden State Financial and Washington Mutual stock, which continued to rise and squeezing me out of some of the positions due to unwise use of too much leverage.

I felt bad for the buyer of my house, who became a close friend, as the price dropped by over 50 percent by 2010 and is probably justing getting back to levels where I sold.

Would I buy a house in California at today’s prices?   Only if the price-to-rent ratio pencils out. Good luck finding one.

Data Of Buying Tops

So, we leave you with an enhanced version of a chart from our last post.

The data illustrates the returns if you had jumped in at prior market tops and bull market peaks.  If you had bought at the feeding frenzy just after a Greenspan juiced Y2K liquidity injection (sound familiar), for example, as many did and held on until Friday’s close, your annualized return would be 3.85 percent before divies.  Dismal.

Price is everything, folks, tune out the market hype, which always loudest at market tops.

Patience and more patience will pay off.

Presidential Stock Market 

We have added a few more presidents to our table in our last post.

Unlucky W. as not only did he suffer 9/11, but his presidency was also bookended by two brutal bear markets, the later maybe some of his own making.

We were a bit surprised by Bush#41 S&P’s outperforming President Reagan’s on an annualized basis, but the S&P was in a brutal bear market in Reagan’s first 18 months as he allowed Fed Chairman Paul Volcker to put the squeeze on the money supply to wring inflationary expectations out of the economy.   Do you think that could happen today?

Bush#41’s relatively decent stock market performance didn’t help him get reelected, did it?

President Trump Chasing History 

Never has the country had a POTUS, who essentially day trades and blatantly manipulates the stock market,  taking credit and linking it to his performance as we do today?   The table below illustrates the path the S&P will have to take from Friday’s close to match the S&P of these prior presidents.

If Trump is a two-term president, which we think is unlikely,  the S&P will have to close at 6405 on January 20, 2025, an annualized 14.46 percent return from Friday’s close to match President Obama’s S&P500.   Not impossible but highly unlikely, in our opinion, unless the official measures of inflation (see here for alternative measures of inflation, which we believe better reflect reality) move significantly higher.  But if inflation kicks higher,  its trouble for the bond market, which with the proliferation of debt over the past 20 years will spell trouble for the global economy and stocks.

Our best guess, the Trump S&P will significantly underperform the Bush#41 S&P.

There you have it, folks.  At worst, some good data for your Holiday cocktail conversations

As always, we reserve the right to be wrong.