This Trump stock market rally — should you say or should you go? Eight lessons

Chart from Macrotrends.net – my annotations. Click for data.

Whatever you think about President Donald Trump, the stock market sure likes him — at the moment.  Stocks are up about 10% since the election, and this three-month run-up simply cannot be ignored. The question is: Is it a rally or a bubble? And what should you do about that?

I have a lot of unpopular views on the stock market because I’m inclined to say things that Wall Street doesn’t want to be said.  For example: We Americans take it as Gospel that giving your money to Wall Street and hoping for the best is the best way to plan for old age. In truth, that’s a fairly nutty idea.

But it’s what we have. If your company is giving you free money through a 401(k) to save for retirement, and the government is giving you a big tax break,too, well, you should take all you can get.

So now we come to today. Look at your retirement investments and you’ll almost certainly see really good news, as the market broader measures are all at or near all-time highs.  If you are old enough, you have to be thinking about the year 2000 and the dot com bubble, or 2007, and the housing bubble. And those times when you wished you had sold your stocks before the bubble burst.  Will that happen again?

I’m not going to give you advice, even though I know that’s what most of you really want.  Instead, I’m going to lay out some facts for you, but most important, urge you not to be a mere passenger on what’s clearly going to be a wild ride.  Take the steering wheel. Evaluate what you are doing with your money right now.

“The market is technically tired, short-term ‘overbought,’ and wildly complacent about an administration whose weak foundations may already be crumbling. Caveat Emptor.”

That’s what Ron Insana said this week about the stock market. Insana’s been one of Wall Street’s most trusted observers for many decades.  His words have weight.

But then, so do the words of Logan Mohtashami, who I think of as the Internet’s chart maven.

“Leading economic indicators are on fire,” he said recently when criticizing folks who are bearish on the economy. “This cycle … is on pace to be the longest expansion on record.”

The two don’t necessarily disagree, however.  One can think the market is short-term “oversold” and at risk for a fall, but still believe that long-term, the U.S. economy is on solid ground.

LESSON NO. 1 — Never forget that (and everyone does), while the stock market and the economy kinda sorta have something to do with each other, not really. People buy and sell stocks rapid fire in an effort to make money.  We are all along for the ride.  Stockholders don’t make money when companies make money. They make money when someone else buys stock they hold at a higher price.  So it’s entirely possible that wages grow and firms expand this year, but the market (and your retirement savings) take a plunge.

If we are in a bubble, there is no way to predict when the bubble will burst. So with that in mind, here are some other critical things to keep in mind.

LESSON No. 2: Whatever you think about the market’s direction, no one should stop putting money into retirement accounts. The best way to save for retirement is…to save for retirement.  Where you put it when it’s there is another question.

LESSON: No. 3: If you are in it for the long term, there isn’t really much to do.  The market goes up and it goes down, but over the long haul, it’s always gone up.  In fact, people who trade frenetically trying to chase market trends pretty much ALWAYS GET HURT.  Think about all the folks who sold in the wake of the Brexit vote, for example.  They lost, bigtime. In fact, they “locked in their losses,” as the pros say.

LESSON No. 4: Not. 3 is meaningless, even dangerous, unless you understand what “the long term” means.  And here is where I’m going to say something really annoying.  The long term isn’t five years, or even 10. Historically speaking, it’s 15 years, and it might be longer.

Yes, 15 years. I’ll prove it in a moment.

LESSON No. 5: The point is this: Any money that you might need to spend on a home, or a car, or health care for the next 15 years shouldn’t be invested in stocks.  If you are 50, and you plan to retire at 65, you need to reconsider where you are investing your money. If you 25 and plan to buy a house before you are 40, you DEFINITELY need to reconsider where your money is.

Please note, if you are 50, you won’t need ALL your retirement money the day you turn 65.  Hopefully you’ll live into your 80s, or later. So, plenty of that 401(k) can stay where it is.  But history says the cash you need at 65 is at risk starting at age 50, so you should start to move than money into safer investments.

LESSON No. 6: So, as for my proof. It’s in the chart above. Let’s say you are the worst trader in the world, and you have a really bad habit of buying into stocks when they are at their highest levels (like…now!).  Let’s say, for example, you were really excited about Pets.com and bought stocks in March 2000. Obviously, you lost a bunch of money.  But you know long it took to recover your losses?

FIFTEEN years. The S&P 500 didn’t return to the lofty heights of 2000 until mid-2015.

Go back a little further in time and the story gets worse.

Say you bought stocks into the late 1960s rally, which peaked at the end of that year.  The S&P 500 didn’t return to that level until…1987. (NOTE: Edited for clarity, see comment below)

TWENTY YEARS.

Or even worse. Say you bought in the gaudy summer of 1929. In that case, the S&P 500 didn’t get back to 1929 levels until 1956, or nearly thirty years later. (NOTE: Edited for clarity, see comment below)

I realize I have cherry picked the absolute worst possible circumstances for this investor. And that’s the good news.  It means in the history of the U.S. stock market, investors who stayed in it for the really long term — 15-20-25 years — have always come out ahead.  That should be a comfort to you.  If you are reasonably young and afraid the market might tank, you really don’t have anything to worry about.  In fact, most economists  would agree that business cycles are shrinking, and you can see that in my examples, so it’s possible that the next major market correction might only take 10 years or so to recover.  Finally, since most of you have been buying stocks over time (dollar-cost averaging) through retirement plans, you have smartly spread out the risk of a dramatic drop I am citing.  So in reality, on average, it would probably only take about half the time I cited above to get back your losses if a crash comes.

So, my definition for you for “the long term” is…at a ABSOLUTE BARE minimum, five years.  For the people I love, I encourage 10-15.  My fear is that most people think of the long term as a year or two. And with that in mind, let me say this:

LESSON No. 7: If you have any money you need in the next few years in stocks, SELL IT NOW.  If you need a down payment for a house, or you don’t have 6 months living expenses in cash, or you car is old, SELL IT NOW.  This is advice I would give you at any time, so it doesn’t at all reflect my opinion of where stocks are headed now.  It’s just good practice.  But today, right now, you have added incentive to do this because you’ve just made a lot of money. Take it. Don’t be greedy.

As for what’s happening in the stock market today, investors are obviously not reacting negatively to what’s happening in Washington D.C., which is odd, because they generally dislike unpredictability. And whatever your persuasion, I don’t think anyone can argue that D.C. seems unpredictable right now. Here are the possibilities as I see them:

• Investors really do believe tax breaks and other pro-business policies are coming, and coming fast. The run-up in bank stocks supports this notion.
• A whole set of investors who were on the sidelines are now beaming with confidence about the market– conservatives who might have bough gold during the Obama years, for example. And they are buying in big-ly.
• Investors have already priced in whatever becomes of the Trump presidency, so tumult isn’t phasing them. It’s not uncommon or Wall Street to shrug at D.C. as white noise that doesn’t really impact their bottom line.
• The fundamentals of the economy really are good.  Intelligent people can disagree about the state of the economy under Obama — job growth was robust, but good job growth was not, as wages were flat.  The last domino to fall in the argument did indeed fall at the end of last year, however.  Workers are finally seeing strong wage gains, as the Census Bureau reported, and several unemployment reports have confirmed.  We can argue about who will get credit for that, but if American workers really do start to gain disposable income, the U.S. economy really could be poised to do something special.

Barring an unexpected event.

Me, I’m skeptical.  I *do* think there are finally green shoots in the economy, but nothing to justify this huge run up in stocks.  The market is destined for a pullback.  So I have done what I always do, and what you should consider, too. I split the baby.  I have “taken some profits.”  But not much. I have sold a few percentage points worth of stock repeatedly during the past few weeks and put it in cash or cash-like instruments.  Most of my retirement is still stocks, because I’m still young!

LESSON No. 8: Sometimes it’s good to leave the poker table a little early in the evening and count your winnings.

Whatever you decide to do, make sure you know why you’re doing it. And do it now. Use this long weekend to think about your investments and make some well-thought-out decisions.

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