The Dow Jones Industrial Average is steadily climbing towards the impressive milestone of 30,000. Day after day, we witness new all-time highs being set. Despite a recent minor dip of 31 points, the index has risen over 15.5 percent so far this year. It truly is an extraordinary time to be alive.
President Donald Trump is thrilled! As the nation’s leader, he seems to believe he has the ability to magically boost the stock market—and he is convinced of it. For instance, early Wednesday morning, he tweeted:
“Stock Market has increased by 5.2 Trillion dollars since the election on November 8th, a 25% increase.”
Just four minutes later, Trump posted another tweet:
“…if Congress gives us the massive tax cuts (and reform) I am asking for, those numbers will grow by leaps and bounds.”
Who can say for certain? Perhaps President Trump is onto something.
Currently, even questionable reforms—and nearly everything else—seem to benefit the stock market. In Trump’s view, gains in the stock market effectively reduce the national debt. He even mentioned this recently.
While the rationale behind how rising stock prices could lead to a reduced national debt remains vague, the notion certainly carries an optimistic tone.
Intelligent Investors
On the flip side, apparent dangers and risks appear to have little impact on the market. The looming threat of nuclear conflict with North Korea doesn’t seem able to halt this bull run; nor do the emerging gold-backed yuan oil agreements underway between Beijing, Moscow, and Tehran, which could challenge the petrodollar’s dominance. Weak employment numbers also seem to have not dampened investors’ enthusiasm.
Even the soaring levels of government, consumer, and corporate debt have not slowed the market’s ascent. Debt is beloved in this environment—especially by bankers, who thrive on it to acquire more stocks.
Extreme valuations no longer raise eyebrows. It’s as though high valuations have become the new normal. Furthermore, the Federal Reserve’s move to reduce its $4.5 trillion balance sheet has hardly caused any concern.
Even President Trump’s controversial tax reform plan, which proposes taxing income that has already been claimed through state and local taxes, has not deterred today’s savvy investors. After all, why worry about taxes when, thanks to Trump, their portfolios have risen by 25 percent since the election?
Indeed, smart investors, particularly those who buy and hold index funds, have enjoyed generous rewards from simply allocating their funds into low-cost S&P 500 ETFs. This strategy has proven successful for nearly a decade—surely it will continue, right?
For instance, a passively managed S&P 500 Index ETF, like the SPDR S&P 500 ETF (NYSE: SPY), has surged over 279 percent since March 9, 2009. Investors who adopted a buy-and-hold approach have reaped the benefits of their easygoing strategy, whereas those who dug deeper into market fundamentals have faced setbacks.
The Donald Can’t Stop It
Yet, while SPY investors have enjoyed the thrill of a growing portfolio, they have also been lulled into a false sense of ease. The extended bull market has led many to believe that investing is straightforward, following just a few basic rules.
The guidelines are simple: Buy and hold the SPY, dollar-cost average, and avoid investing in individual stocks. With this approach, you will inevitably come out ahead in the long term.
Investors in SPY don’t need to analyze company fundamentals or determine which businesses are thriving. They can skip the meticulous review of financial statements, growth forecasts, or potential risks. There’s no need to read the fine print or put in any effort.
The bull market hasn’t just attracted individual investors; it has also garnered interest from funds and institutions alike. This phenomenon has driven the market higher despite a lack of fundamental justification.
Without a doubt, purchasing SPY has yielded fantastic returns over the past eight years—who could argue against a 279 percent gain? However, the same strategy may not play out well over the next eight years.
While passively managed ETFs that track the S&P 500 are excellent during prolonged market upswings, they can be devastating during bear markets when steep declines occur. If the stock market were to drop by 50 percent—which is likely—these ETFs would similarly plummet.
With each passing day, the bull market edges closer to its eventual end. At that point, the upward trajectory will reverse, sending SPY portfolios spiraling downward as investors collectively attempt to exit the market in a frenzied rush.
Ultimately, when the moment comes, even The Donald will be unable to stop it.
Sincerely,
MN Gordon
for Economic Prism
