Trump’s market ignorance nears record highs

Saying Donald Trump is mistaken is like saying Wednesday follows Tuesday – everyone knows it to be true. Still, let me say it: Trump is mistaken about the stock market.

“It would be really nice if the Fake News Media would report the virtually unprecedented stock market growth since the election,” he tweeted last Wednesday. The media is, in fact, giving plenty of coverage to the ongoing bull market.

As for the “virtually unprecedented” gains, the S&P 500 has gained 19 per cent since Trump’s election – identical to the 11-month gains that followed Obama’s 2012 victory, and well behind those seen during the Clinton and Bush administrations in 1996 and 1988, respectively.

Trump ranks seventh in terms of first-year gains, which doesn’t quite equate to “virtually unprecedented”. Worse, Trump claimed market gains “in a sense” reduced the national debt. The US owes over $20 trillion, but “we picked up $5.2 trillion just in the stock market”.

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Stock market gains have, of course, no bearing on the national debt. Trump's boast is equivalent to Obama saying he balanced the books, that US debt didn't really increase by $10 trillion between 2009 and 2017 because the stock market gained by roughly the same amount over the same period. New Nobel economics winner Richard Thaler put it well: Trump's "ratio of certitude to knowledge is nearing record highs".

Easy money for investors

There's nothing historic about the extent of equity gains under Trump, but the manner in which they have been achieved is extraordinary. I'm talking about volatility, or the lack of it. There has never been a calendar year where the S&P 500 gained each month, but it has done so in each of the first 10 months of 2017, notes Ritholtz Wealth Management's Ben Carlson.

The average daily price change is just 0.31 per cent, the lowest number since 1965. The biggest peak-to-trough decline has been just 2.8 per cent, the shallowest on record and way below the average intra-year decline of 16 per cent, says Carlson. It’s not meant to be this easy. Stocks soared in 2009, but not before enduring a 28 per cent fall. They gained 13 per cent in 2010, but also suffered a 16 per cent swoon. They rose 13 per cent in 2012 but also experienced a double-digit correction.

In 2017, however, the S&P’s 16 per cent gain is almost six times greater than its biggest decline. Such a large ratio of upside to downside is extremely rare, notes CNBC’s Michael Santoli, making 2017 one of “the most effortlessly profitable years” in modern history. Hopefully, no one will tell Trump.

The days of ‘risk-on, risk-off’ are gone

The ro-ro era has ended. Since the global financial crisis, stockpickers and active fund managers have been frustrated by the risk-on, risk-off phenomenon. Stocks and sectors were driven by macro and monetary policies rather than company-specific news, resulting in them rising and falling in unison.

This year, however, has witnessed a "great correlation collapse", as Bernstein analysts termed it earlier this year, a point echoed by Nicholas Colas of DataTrek Research.

Since 2010, correlations of about 90 per cent have been common (a correlation of 100 per cent means a sector is moving in the exact same direction as the market) but they have now fallen to 41 per cent – the lowest since at least 2009, says Colas.

In fact, Charles Schwab data indicates correlations between individual stocks and the market are at their lowest since 2001. It’s a return to normality. After years of ro-ro, “US equity markets are actually behaving like the proverbial ‘market of stocks’ rather than a ‘stock market’ ”, says Colas.

Japanese gains come too late for Leeson

Last week's Bloomberg headline regarding Japanese gains – " Japan Stocks Hit 21-Year High as Investors Shrug Off Concerns" – was a glass half-full interpretation.

Another way of putting it would be to say that stocks have gone absolutely nowhere over the last two decades. Japan's long drought is a reminder that stocks are not always a safe long-term bet. Data from London Business School professor Elroy Dimson, co-author of the annual Global Investment Returns Yearbook, shows all but three developed countries have experienced 20-year periods where stocks didn't keep up with inflation.

In the 20th century, Japan, Germany and Spain each experienced 50-year periods where real returns were negative; France, Italy, Austria and Belgium lagged inflation over 60-year periods. That's why investors should be wary of home bias and diversify globally rather than keeping all their eggs in one basket. Incidentally, last week's gains were noted by Nick Leeson, the rogue trader whose disastrous bet on the Japanese market led to the collapse of Barings Bank in 1995.

“Probably not far off my break-even point,” tweeted Leeson. “If only they’d waited!!”