So, how’s your crystal ball working out for you this year? Did you pick Cleveland to win the World Series? Do you see the Redskins going all the way? Did you pick Donald Trump to crash and burn? And how about that stock market? What happened to the oft-predicted slump, especially if the unthinkable happened and you-know-who got elected? Which he did.
Financial plannerArthur Stein thinks lots of so-called experts got caught with their hopes up and their knickers down. He’s going to be our guest today on Your Turnat 10 a.m. EST. Listen if you can, and tell a friend. Meantime, here’s his explanation of what happened and what’s happening:
It wasn’t just political experts who looked bad after President-elect Donald Trump’s recent victory. Stock market forecasters also looked bad. Most predicted that if Trump won, stock prices would sharply decline.
Before the election, analysts were comparing stock market fluctuations to fluctuations in the relative popularity of Trump and Democratic candidate Hillary Clinton. It appeared to them that when Trump was doing better, the stock markets declined. When he was doing worse, markets rose. Conclusion: The markets would do better if Clinton were elected.
Immediately after the election, declines were still being forecast. A CBS News Moneywatch article on Nov. 9, at 5 a.m. — hours after the election was called but before U.S. markets opened — predicted a 7 percent decline because of Trump’s victory. According to the author, “It’ll likely resemble the fallout from this past summer’s Brexit [stock market decline] all over again. Only bigger. And it’ll likely continue.”
Well, the predicted declines didn’t happen. U.S. stock market indexes rose on the day after election and have continued to increase. The C Fund (S&P 500 Index of stocks) has increased 6.3 percent since the election. The S fund (small and mid-cap U.S. stocks) has increased 16.9 percent! However, the F Fund (bond) declined 3.3 percent as interest rates increased.
TSP Returns Since Election and Beginning of 2016
Since Jan. 1, 2016
Sources: Calculations by Arthur Stein using TSP share prices from TSP.gov
So why are stocks up and bonds down? Well, many of the same experts that predicted stock market declines are now explaining the increase.
Frequently mentioned reasons include:
The expectation that the Trump administration and the Republican congressional majorities will:
Increase government spending to pump up the economy.
Reduce government oversight of corporate actions, which would probably increase profits.
The U.S. economy is doing fairly well. The New York Times pointed out that:
The economy has added private sector jobs for 80 straight months.
The November unemployment rate was the lowest since August 2007.
Wage growth is running ahead of inflation
Consumer confidence is at the highest level in a decade.
Another theory is that the recent increases were a random event. Maybe the same stock and bond market fluctuations would have occurred if Hillary Clinton won. Maybe markets increased because everyone was thrilled the election was over.
Notice in this chart that the C Fund began moving up and the F Fund began decreasing before the election.
Forecasting hasn’t been reliable in predicting short-term stock market movements. In most cases, short-term changes are random events.
One forecast that will be reliable: Continued stock market forecasting by experts, leading investors and talking heads. You should ignore these and concentrate on your long-term goals and long-term market trends. — Arthur Stein