It has become impolite to suggest that the working-class voters who voted for Donald Trump last month got conned. It's the elites who are the fools, supposedly, underestimating the shrewd politics of Mr. Trump, his supporters' heartfelt desires for change, and the new normalcy of a Trump administration.
Alas, this rapid revisionism may be creating a new class of suckers: investors in U.S. equities. Their enthusiasm for what Mr. Trump may bring as president has created the best post-election rally in equities since the Second World War, with Dow 20,000 the big, round exclamation point on the fervour. Global equity funds received $21-billion (U.S.) in the past week – their ninth-biggest inflow ever.
In their expectations for economic growth and a surge in corporate profits, investors are disregarding just how well-aged those two trends are. Let's remember that the talk before the election was the length of the current economic expansion and the doubts about how much longer it can continue.
More importantly, in their overwhelming desire for certainty, investors are disregarding the prospect of a greater uncertainty, the global chaos and disorder that seems a probable result of a Trump presidency. To buy or hold U.S. stocks now is to go all-in on Mr. Trump – a dangerous and risky bet at today's new prices.
To be sure, my personal politics colour my view. I've had plenty of time to decide that Mr. Trump is an authoritarian vulgarian, embraced by the racist trolls who had previously been cast out of polite U.S. society. The purported successful businessman littered his career with threats, lawsuits and bankruptcies. He either does not know or does not care about the difference between truth and lies, far more so than any politician you might impugn with a similar allegation. He is an unhinged narcissist.
Here is what has happened to markets in the last month, per a measure that I've been calling on for several years: How many members of the Standard & Poor's 500 have dividend yields that exceed the 10-year Treasury note? In several recent sharp declines in U.S. equity markets, bond yields declined as equities also fell. That meant a jump in the number of blue chips you could buy that out-yielded treasuries while offering the upside of equities.
The opposite has occurred in recent weeks. On Nov. 4, the Friday before the election, 287 members of the S&P 500 had dividend yields higher than the 1.78 per cent that the 10-year note provided. By this week, the 10-year touched 2.5 per cent, the highest yield in more than two years, and the number of S&P 500 constituents that could beat it fell to 154 by Wednesday.
Are any of these "cheap"? I plugged in the S&P 500's average multiples for forward price-to-earnings (18.5) and enterprise value to earnings before interest, taxes, depreciation and amortization (11.6) and found 64 results below those averages, including a number of utilities, bricks-and-mortar retailers, and The Boeing Co., which has recovered after seeing its shares drop on a quick tweet from Trump's new bully pulpit.
Jonathan Golub, the chief U.S. equity strategist at RBC, produced a note Tuesday called In Defense of the Trump Rally in which he argues the market isn't currently overvalued. In it, he notes, correctly, that analysts tend to be cautious in adjusting their estimates following breaking news, while investors "are quicker to respond to incomplete information." He argues that once analysts catch up to the market and increase their earnings estimates, "the false impression that valuations are stretched" will end, and "the pro-cyclical tone of the market and its trajectory forward will continue to work in tandem throughout 2017."
That is an argument of normalcy. I'm sticking to the view that we're heading down a deeply abnormal path. (As is short-seller Doug Kass, who told Bloomberg News this week that Trump is the new "Orange Swan," a play on Nassim Nicholas Taleb's treatise on unforeseen market-roiling events, The Black Swan.)
In the last five weeks, I've already had a dollar gain in my relatively modest retirement account that, sadly, exceeds the annual incomes of some Mr. Trump voters. But rather than feel guilt, I'm selling. I ditched U.S. financials the week after the election, with some proceeds placed in companies that do business in Mexico: Kansas City Southern and Constellation Brands. I'm continuing: Last week, my sales included Greenbrier Cos. Inc., a maker of railway cars (many used to haul coal, for which Mr. Trump has promised a comeback), and Apple Inc., with its ties to China, which Mr. Trump has managed to enrage even before taking office. I think trade with China is imperilled in ways like never before, and Mr. Trump has said he wants iPhones made in the U.S.
There are likely more dispositions to come. I think Mr. Trump will make the world a more dangerous place, and a more dangerous place to invest.
David Milstead