The Market Cycle Of Politics: Should You Play The Trump Trade?
Is it going to be the golden era of the United States or an era of stagnation? I refuse to bet on any of these options. I think everything will be just fine.
Donald Trump is set to begin his second term next Monday. To my knowledge, this type of comeback only happened twice in US history: One by Grover Cleveland in 1892 and the other by Trump in 2024.
His comeback divided the United States. Democrats now largely think that everything they gained over the last decade since Obama’s historical triumph is about to go down the toilet; Republicans, on the other hand, think that America will live its golden age.
This division reflects on the realm of investing too. People either think the market is going to crash really hard or it’ll climb to the record highs that were unimaginable before. In this division, we as investors should be the group that knows that we should remain skeptical about both forecasts. Because we know the market moves in cycles.
Great investor Howard Marks explains the primary reason for market cycles in his great book “Mastering The Market Cycle”.
Cycles happen primarily because human’s tendency to take things to their extreme.
-Howard Marks
To those who are willing to see, that applies perfectly to politics. There are of course some people who are blindly devoted to an ideology just like some stocks have their cult followings. However, most people try to be as reasonable as they can get. Most people are not blindly progressive or conservative.
There are things we like and don’t want to change, there are things we would like to change, there are things we can change our minds about and there are things we are not ready to accept. These edges within us create a pendulum just like optimism and pessimism create in markets.
When things change in positive ways we are happy. We are glad to see more people have healthcare, cities become safer, people become more tolerant of each other. These of course require the Government to take more responsibility, boost spending, use its regulatory powers etc… But then some people take things to their extreme and we find ourselves paying excessive tax, cities filled with homelessness under open shelter policies, media restricting voices against the policies in place etc… We don’t want to pay excessive tax, we don’t want widespread homelessness in our cities, we don't want free speech to be restricted just because some people can find it offensive, this is the essence of free speech and it’s the real tolerance. We become more conservative than progressive.
Then the same thing happens. Under the notion of conservatism, some people start questioning fundamental rights, start questioning equality, unduly restrict social benefits, make it harder for women to get abortion etc… Pendulum swings to progressive side again, just like the market does between optimism and pessimism.
We evolve this way. It’s just like natural selection. As the pendulum swings between progressivism and conservatism, we eliminate far ends on both sides and we meet on a compromise that works and takes us to the future. In the grand scheme of things, we develop. I don’t know any period in human history where humanity was better off in 500 years before that. I don’t know of any period in US history where Americans were better off 30 years before that.
What’s the lesson here?
Don’t think everything will go down the toilet or off the roof. Always keep your optimism. The thing with pessimism is that you can’t make money off it even if you turn out to be true. Even short sellers are optimists. They are optimistic that the market will notice the malfunction they noticed.
For investors, it has further implications. Don’t leave the market thinking a crash is coming. As Peter Lynch says, more money is lost in waiting for the crashes than in crashes themselves. Also, don’t put all your money in beaten down oil stocks thinking that they will skyrocket under Trump.
I think Occidental Petroleum illustrates this point.
It’s a good company and its stock was down 10% last year.
There is no consistent revenue growth.
Its operating margin also fluctuated greatly.
It sells oil of which price is largely determined by macros.
Its balance sheet is strong as its Debt/Equity ratio is near one.
What can it do in the next 4 years under Trump? Assume that, in the best case, it can double the revenue. Stock can, at most, triple with the help of some operating leverage and multiple expansion.
But many things depend on macro events that can’t be controlled either by this company or by the Trump administration. I think it’s better to just assume that Amazon will make more money 4 years from now. If it doesn’t, we probably have more serious problems in the world and we won’t care about that.
It’s always better to buy great companies and think that they will do well over the long term than trying to predict what the market will do tomorrow because of the policies of this President or that. It’s also always better to believe that humanity will fare better in the next 50 years than speculating about tomorrow.
Investing has some great fundamental wisdoms applicable to all areas of life, stick with them.
Don’t get too hyped about the market returns but don’t sell your positions either. Don’t think the next 4 years will be the golden days of humanity but also don’t think everything will get worse.
Overall, everything will be just fine.
Great article.
I would say investors should not loose the long run view, stay focused and remember the fact that although politics is one of the biggest macro factor markets have other catalysts also.
By year end I think all will be OK with a slight up-tick in markets across the board; however; I believe that some sort of Black Swan event is on the horizon and will hit before the 4th quarter. That B S might be caused by bank failure, credit crisis, silver shortage or whatever else.