I’ve posted Entry #328 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Jump in Stock Prices Following Trump’s Victory Could Be a Bad Sign.
Juicy Excerpt: My concern is over the question of why investors are reacting to Trump’s election in the way they are. A Buy-and-Holder would say that it is because they expect to see tax cuts or a huge bill that will produce jobs and spending and profits. But someone who believes that price changes are caused by shifts in investor emotion sees something different in this investor reaction. I see investors who are fearful that a crash is coming and who are trying to quiet those fears and who are generating optimism about the economic effects of Trump’s election as a means to do so.
Stock prices were insanely high in 1996. It would have been correct (in my view) to conclude from that that stocks were dangerous. However, it would not have been correct to conclude that stock prices would fall hard in 1997. As we saw, stock prices soared in 1997 and in 1998 too and in 1999 as well. A natural human reaction in times of desperation is to embrace the thing that is causing the fear that cannot be acknowledged. An alcoholic drinks harder to prove to himself that he has things under control. A man close to losing his job becomes more outspoken in criticism of his boss to persuade himself and those within hearing distance that he is sure that all is well.
Are we bidding up stock prices because we think that Trump is going to take the economy to a good place? Or are we fearful that the time to pay the piper for the phony profits of the past 20 years has finally arrived and feeling a need to convince ourselves otherwise with one final high-valuations fling?