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What will Trump equities this year?

Alan Steel2015 had been predicted by most experts to be a good year for stock market investors.  Based on what? Most probably because the previous two years had been pretty special. 

They call it “recency bias”.  Double digit total return gains occurred in 2013 and 2014 in the US and UK despite the fears most of us have forgotten by now.  

There’s an old adage that says whatever is hitting the headlines or front pages of financial mags you’d be best to do the exact opposite.  Something to do with rumours and news I believe. Whatever – it works !

So  the expert consensus got 2015 wrong.  It turned out to be a crap year, especially for Index Tracking fans. The main US Index the S&P 500 Total Return (that’s including reinvested dividends) was a measly 1.8%.

And as a consequence two things happened. Quoted “experts” predicted 2016 would continue the disappointment and investors here and in the US abandoned their equity holdings in a rush to “safety” – bonds, cash and absolute return funds (recency bias again).  

Pension Scheme Trustees too, pestered by regulators who wouldn’t understand risk even if it jumped out of their soup at them, relented.  Anything for an easy life, as one mentally exhausted trustee told me. 

In December 2015, Tim Hayes, of world-renowned independent US economic analysts Ned Davis, issued his 2016 paper, 37 pages long on what their detailed research suggested.

He reminded us that progress in life is cyclical, not linear, either short term in nature,  or in long cycles known as secular. 

That report underlined their belief that a secular positive period for stock markets, known to the trade as Bull Markets, had begun in 2009 and was still in place.

And that in the past, a weak year in secular bulls was typically followed by two consecutive double digit return years. (I have their full report here with me if anybody doesn’t believe me. )

Their faith was sorely tested last January into February with the worst ever start to US and UK stock market indices.  Guess what the number one worry was that caused the falls?

As Tim reports: “a final burst of deflation fear sent equities to new lows”. Deflation! Remember that? Remember how deflation would bring world economies tumbling down?

Did you spot the Aw Naw headlines this past week? Experts thought UK Inflation would “jump” to 1.5%, but it “soared” to 1.6% instead.  

Don’t know about you, but how do you tell the difference?  And secondly, how did my generation survive the 1970s and 1980s with inflation in ’76 hitting 26% and for the best part of 25 years an average UK inflation around 12%pa?

Ned Davis Research called 2016 spot on.  As did Pring Turner, Scott Grannis , and Dash of Insight… all US based research houses.  UK investors who decided it made sense buying US funds or trackers did brilliantly well last year, up at least 40% over 12 months in sterling terms.

But I can’t see such heady returns happening again this year, based simply on the probability the pound is likely to sit in a trading range.  It should be another double digit year for investors though ignoring the gloom laden headlines and all the nonsense we hear about Brexit and Trumpton.

Finally, it does look increasingly likely that long term secular moves such as the 35 year Bull in Gilts and other Government bonds are over. 

It also looks like profit growth is returning with a bang to companies. All over the world, too, by the looks of it.  

Sectors that struggled this last eight years or so since the great financial crisis (or cock up, as some call it) are making a sharp recovery as the last six months’ performance numbers show.

Value, as it’s called, is most likely to be the new winner for quite a few years in equity portfolios.

With an end to Quantitative Easing by Central Bankers and rising interest rates, never mind Trump’s plans for lower taxes and infrastructure spending, this could well be the time to follow the best Active Value funds, if you haven’t already done so.  

There could be a nice wee correction in markets coming along which will dominate headlines again and shake out weak hands. Time to buy, I imagine.

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

www.alansteel.com

This is a regular column submitted via the DBdirect service. For details click here. 

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