5 Signs the Trump Stock Rally Will Come to an End

The next four years might not be a bed of roses for stock market investors.

(Image credit: kamisoka)

Donald Trump plans to shake up Washington. My fear is that he’s also going to shake up the stock market. His inability to control his Twitter finger and his frequent policy shifts are unnerving investors. There’s nothing Wall Street hates worse than uncertainty — and Trump is nothing if not unpredictable.

The stock market has shot up since Donald Trump won the November 8 election on expectations that the new president will bring faster economic growth and with it a small, healthy pickup in inflation. But the rally in stocks has stalled in recent weeks, and, in my view, more trouble is on the horizon.

I won’t belabor Trump’s policy reversals. They’ve been well-documented elsewhere. Suffice it to say that he has been on both sides of almost every major issue—from abortion to relations with Russia, from nuclear weapons to the Iraq war.

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But Trump’s agenda poses other major problems for the markets. Strangely, Wall Street has embraced the parts of Trump’s campaign rhetoric that it likes while assuming that he’ll abandon the things the market doesn’t like. That’s a risky wager.

Don’t get me wrong. The Trump plan clearly has some positives for stocks. If enacted, his proposed massive tax cuts for individuals and corporations would boost consumer and corporate spending.

Trump has also called for deregulation, freeing businesses to raise productivity and profits while decreasing the amount of time and dollars devoted to complying with such things as environmental and workplace regulations. That’s another plus for the stock market.

Watch for these warning signals

But consider some of the potential negatives that Trump presents for stocks.

Protectionism. Restrictions on trade are a central part of Trump’s agenda. He’s proposed tariffs on imports from China and Mexico of 45% and 35%, respectively. Is he serious? Many economists say he can’t be. Tariffs such as those could ignite a full-scale trade war and bring disaster to the global economy. If the United States turns towards protectionism, even a milder version, it would certainly bring higher prices on imports, and it might even push the U.S. and some of its trading partners into recession.

Immigration curbs. Trump’s signature campaign issue was animus toward immigration. He called for deporting as many as 11 million illegal immigrants from Mexico and other countries, and reducing the number of new immigrants. With the number of U.S. workers applying for new unemployment benefits at its lowest level in 40 years, curbs on immigration could mean severe shortages of unskilled workers.

Trump has also called for sharp reductions in the H-1B visa program, which allows tens of thousands of highly skilled workers to come from abroad temporarily. Silicon Valley is particularly worried about the possible loss of these workers, many of whom are scientists, engineers and computer programmers.

Higher deficits and interest rates. The flip side of massive tax cuts is bigger budget deficits. That would almost certainly push interest rates higher. Higher interest rates have a braking effect on economic growth and would be particularly harmful to companies that issue a lot of debt.

A stronger dollar. Trump says the dollar is too strong and accuses China of unfairly pushing down the value of the yuan. But higher interest rates in the U.S. would likely lead to an even stronger greenback. A strong dollar hurts U.S. exporters and multinational firms.

Inflation. Trump has also called for massive infrastructure spending, although he has been quiet about that in recent weeks. A giant tax cut on top of big spending on infrastructure in an economy that’s pretty healthy could fan inflation. A little inflation would be a good thing, but policymakers have learned the hard way that a little inflation often becomes a lot of inflation. The Federal Reserve would almost certainly act to prevent that, but, in doing so, would likely slow the economy.

What the stock market is saying now

Trump, on balance, is a huge minus for stocks, in my view. But politicians, even presidents, only have so much influence on the markets. Other factors are at least as important.

My favorite market strategist, Jim Stack, editor of InvesTech Research, considers the internal health of the market as well as economic indicators to arrive at his market view.

Both, he says, are shouting “buy.” The market rally, thus far, has been broad. Shares of small, midsize and large companies have all been going up. Far more stocks are rising most days than are declining, Stack points out.

The economy is also gathering strength. The Conference Board’s Consumer Confidence Index recently vaulted to its highest level since 2001. Regional surveys of manufacturing are moving higher. Confidence among home builders has moved to its highest level since 2005.

However, no matter how you look at the market, it’s expensive. Doug Ramsey, chief investment officer of the Leuthold Group, an investment research firm, says that U.S. stock prices are in the 90th percentile and above compared with their historical averages—whether you look at price-earnings ratios or other multiples, including price-to-cash flow, price-to-book value or price-to-sales. The only time the market has been pricier, Ramsey says, was in the late 1990s during the tech bubble.

High valuations don’t cause bear markets, but they often signal how deep bear-market losses will be. I don’t know when the next bear market will begin. But with Trump at the helm, I fear it could come sooner than it would have with someone else in the White House.

What to do? I wouldn’t sell anything now. But watch the market’s price and volume patterns as well as the forward-looking economic indicators. When they start to deteriorate, it’s time to cut back on your stock holdings.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.