This article discusses a letter written by investor Seth Klarman to his clients which details the effects he believes President Trump will have on the economy. Seth Klarman is an investing giant, and his advice is used by the masses in hopes of benefiting from his wisdom.
That's why this particular letter caused shockwaves in the financial community, as Klarman warned against buying into the surge in stocks from Trump's proposed policies that seem to be company friendly. The main stream confidence in these policies seems to be backed up by the fact that the market has reached an all time high since the election shooting up an unprecedented 600 points in a mere three months.
Klarman, however, isn't so convinced. He points out that investors have been infatuated with the 20% corporate tax cut proposed by President Trump but fail to recognize the dangers of his protectionist trade policy. He continues with the argument that political polarization is worse than ever before, a point few can argue with.
While Klarman does bring up an interesting counter argument to most powerful investor's opinions, his pessimism seems to be unwarranted when you take a closer look.
In regard to the "protectionism policy" that Klarman fears will stall trade between nations, the recent productive meetings between Trump and World Leaders indicate the President's trade policies may be more moderate. Leaders from Americas biggest trade partners such as China, Japan, and Canada have all came away from meetings with President Trump with optimistic messages about Trade going forward.
The one country that hasn't been sordial with the United States since the Election is Mexico. However, we ran a trade deficit with Mexico last year of $58 Billion, despite the U.S having a GDP $15 Trillion higher Mexico's. With the U.S in a huge trade deficit despite having all the relative power, something logically must change with or without Mexico's approval.
Klarman's next point about political parties being extremely polarized does hold true. However this will not affect almost all trade policies as the Republicans hold the Senate, Congress and Presidency, meaning they can pass any bill with no real resistance.
Klarman has worried many of his followers, but when you take a closer look the risk isn't nearly as great as he indiates.
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What's driving the surge in stocks?March 1, 2017 | The Associated Press
The Dow Jones Industrial average reached 21,000 for the first time ever this week, continuing a trend of unprecedented market growth. This has left the public wondering what is driving such a historic run. The Associated press addresses this question in their well rounded article "What's driving the surge in stocks?". Through critical thinking, the AP explores economic drivers that may not be obvious at first glance.
The article first addresses the obvious contributor to growth, the "Trump Bump". The term "Trump Bump" comes form the thinking that tax cuts and deregulation from the new President's policies will lead to higher profits for companies. This Bump is undeniably a major factor in the growth, with the S&P 500 growing more in the 4 months since the election than it has in the four years prior.
Many simple see these business friendly policies as the driver behind three trillion dollars in wealth being added to the economy and the highest consumer confidence ratings since the great recession. The AP correctly points out that such tremendous growth isn't solely based off of policy proposals.
Another reason for the surge stems from the unemployment rate dropping steadily since the Great Recession. After climbing to nearly 10% in 2009, the unemployment rate has decreased to a current rate of 4.8%. Economic experts point out that this is nearly full employment when you subtract out frictional unemployment and seasonal factors. This stems from consecutive job growth over the last eight years, which has lowered the unemployment rate and circulated money through the economy by enriching citizens through salaries.
With the economy as a whole having rather stagnate growth over the past 8 years, many people have stored their money in bonds and saving accounts instead of buying stocks. As the economy grew after the election from expected company friendly policy implementation, consumer confidence increased leading to more money being invested in the riskier stock market. This influx of $20.7 billion into U.S. stock funds in November, the biggest month in nearly two years, amped up market growth.
Also adding to this consumer confidence is the strength of the economies around the world. This world wide growth raises profit expectations for large US companies that do global business. Increased profits are nearly directly correlated to increased stock prices, and have also helped fuel the market's surge.
The AP correctly acknowledges that President Trump's economic policies have been the main driver to the Stock surge that has taken the nation by storm. What makes this article standout, though, is it's thorough breakdown of how reduced unemployment, higher consumer confidence, and new economic policies have worked together to promote historic market growth.
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Two companies spending to dominate the world.
April 5th 2017 | Abigail Stevenson
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Abigail Stevenson is a Wall Street veteran and a Producer for the show "Mad Money" on CNBC. She touches on an interesting topic of how the Market reacts irrationally when it comes to Trade or Monetary policy, leaving an inefficiency in the Market that investors can take advantage of with the right timing. She goes on to argue that the world's biggest companies Facebook and Alphabet are immune to this because of the amount of money they have to spend.
People tend to act in unison. If someone sees the majority doing some act, they are more likely to also take part. This phenomena holds true in investing as when someones see's a stock price growing or shrinking, they usually want to take part in the action. The rational is usually there for a small decrease in stock value when a company does something negative, but far too often it get's over blown.
When the "heard" of investors acting solely on others actions start to sell off or buy a stock, it often causes a loss or gain in value that is greater than the information that was discovered.
This causes an inefficiency in the market with stocks being either over or undervalued. In the case of the stock being undervalued, an investor would buy the stock when he anticipated the sell off had reached it peak, and wait for the rest of the market to realize that the problem with company was not as negative as they thought. This would lead to the market eventually gaining back trust in the company and buying back shares to increase it's price, giving the person who bought low a quick profit.
In the case of a company getting positive information that causes the market to buy shares at high frequency, you would seek a short sale when you anticipate the stock had reached it's peak price. If you were correct, the market would realize the positive information wasn't as relative as they thought, leading to shares being sold and the price dropping.
It's worth to note that these inefficiencies are more prevalent when polarizing issues appear in the news and drive the price down or up. For instance, if there is a gaffe in healthcare policy, the medical industry will suffer great losses. This stems from healthcare being a widely debated topic, thus more people than average know about this problem.
Often times the policy can be passed with a different bill in the coming weeks as politicians know they need to act fast for their reputation. If you can time the passing of the healthcare bill correctly, you could buy the stock right before the policy introduction and take advantage of the over reaction to the previous bill not passing.
The reason why the author argues that Google and Alphabet are immune to this inefficiency is that consumers will always have trust in a company as dominant as these two. There staying power is in fact unprecedented in American history.
Another factor that keeps these companies stock price so efficient is the products they sell. People will always need phones and computers, and with googles unique product traits it's hard to transfer information to another companies computer or phone. Similarly Facebook has so many users that you can communicate with almost anyone you want to find. This makes it nearly impossible for competitors to take business from them as people want to be on a social media sight that lets them access everyone.