The Trump Rally - How High Will It Go?
The stock market has been a rollercoaster as of late. Prior to the election, it posted the most consecutive days of losses in decades. Then after the election it posted the most consecutive gains in years.
We are now at record highs and people are wondering how long this rally will last.
The two opposing factors to consider are the Trump effect vs. interest rate hikes.
Lower U.S. regulations, lower taxes, and increased government spending will certainly have a positive impact on U.S. businesses which increases their competitiveness and profits.
On the other hand, the Fed has come under increased pressure to begin raising rates back to a normal level. Rates have averaged 4.9% since the 1950’s, however have been under 0.5% for the past eight years.
Many fear that the longer the Fed waits to raise rates, the more risk there is to the economy, particularly if the U.S. experiences another recession and the Fed cannot respond by lowering rates any further.
It’s nearly guaranteed the Fed will raise rates this December, however the bigger question is how fast subsequent raises will come.
If by December the economy still appears stable, inflation appears to be rising, and the stock market is still happy, expect the Fed to take a more aggressive rate hike which will discourage stock investments and may cause a dip.
Also note the Forward P/E ratio is at one of the highest points in years, well above its historical average. This, in combination with the all too certain interest rate hikes, point to a likely dip in the near future.
Having said that, we certainly do not want to allocate 100% of our portfolios in bearish positions as the stock market does rise over the long-term. However, we must be smart and picking when taking bullish positions in these record-setting times.
Personally I have been buying value, dividend-based ETFs during intraday dips and selling on the uptrend. These types of ETFs are a great balance between riding the wave up while lowering downside risk (since dividends are expected to be maintained even if the market drops). And of course I’m still purchasing Puts in overvalued companies as a hedge against the future market downturn.
The important point is to invest wisely and without emotion. As we’ve seen with this presidential election, the market can quickly take a 180-turn. Don’t be left holding the bag at the end of the rally.
Positions that you take now should be those that you don’t mind holding over the long-term if the market dips. This means limiting speculative positions and focusing on strong, value companies.
Invest wisely and profit from other’s fear and greed.