Watch out for the post-Trump US Election rally. Here’s the expert who created a fund that beats 97% of its rivals.
Following the victory of Republican tycoon Donald Trump in the 2024 U.S. elections, Wall Street and other markets have been on a buying spree—some would argue, perhaps too much so.
The buying frenzy hasn’t been limited to stocks that will directly benefit from Trump’s anticipated policies, such as Tesla (TSLA) or the “crypto stocks,” but also extends to any stocks expected to ride the wave of deregulation that many analysts believe will benefit Bitcoin and the broader cryptocurrency sector.
The U.S. stock market has been on a bullish run, continually hitting historic highs, especially in major indices like the [S&P 500] and [Nasdaq Composite].
A Buying Boom, but Some Are Starting to Call for Caution
As a result of the buying surge, the S&P 500 has now surpassed the 6,000-point mark, while the Nasdaq Composite has broken through 19,000 points. The optimism largely stems from the certainty traders felt after the election results, with Trump’s clear victory eliminating the risk of a contested outcome that could have introduced instability into the markets.
But not everyone is buying into the euphoria. Some are beginning to raise alarms, warning that Wall Street could be heading toward a "disaster."
One of the most prominent voices of caution is Bill Smead, founder of Smead Capital Management.
Speaking with Business Insider Smead, whose Smead Value Fund (SMVLX) has outperformed 97% of its peers over the past 15 years, according to Morningstar, is sounding the alarm about a potential bubble forming in U.S. stocks.
Smead pointed to historical precedents to support his concerns, recalling how Wall Street reacted when Ronald Reagan won the presidency in 1980. Back then, stocks surged by 29% in the months leading up to the election, only for the market to enter a bear phase shortly after Reagan’s victory. From November 1980 to July 1982, the S&P 500 fell by 27%, driven by a recession that hit the U.S. economy hard, despite a relatively low P/E ratio of 7.5 times.
History Repeating? The Reagan-Trump Parallel
Smead sees a striking parallel between the presidencies of Ronald Reagan and Donald Trump, as both are focused on policies of deregulation and tax cuts.
While these factors are often seen as bullish for stocks, Smead notes that such policies didn’t shield the market from a downturn during Reagan’s first term.
In his view, the buying surge that followed Trump’s victory has only served to exacerbate an already risky situation. The market’s rapid ascent has inflated the level of risk, making a correction more likely.
The so-called "Trump bump," which saw the Dow Jones surge 3.5% in a single session following the election, has contributed to the sense of inevitable upward momentum. However, Smead argues that this surge is unsustainable and could trigger a major reality check for investors who have been riding the wave.
"It’s a disaster waiting to happen," Smead has told Business Insider, echoing similar concerns raised by Goldman Sachs’ research division.
Just a month ago, Goldman Sachs analysts predicted that the S&P 500 could deliver an annualized return of just 3% over the next 10 months—lower than the yield on current Treasury bonds.
In addition to inflated stock valuations, Smead highlighted another worrying factor: the historically high levels of investor euphoria.
According to a key metric, American households now hold 42% of all their assets in stocks—the highest percentage ever recorded. This is a troubling signal, as such levels of stock ownership have often preceded major market corrections, including during the dot-com bubble, before the financial crisis of 2007, and again in 2021, when Wall Street plunged by 25%.
Could This Be Worse than the Dot-Com Bubble?
Smead believes the current bubble could be even more dangerous than the dot-com bubble of the late 1990s. “Back then, it was mainly tech that was egregious. This time, it’s tech and almost anything growthy. I promise you, Costco wasn’t trading at 53x earnings at the end of ’99”, he said, pointing to the example of Costco.
Smead is not alone in his caution. According to Business Insider Dave Sekera, senior market strategist at Morningstar, ha also warned that investors should avoid making hasty decisions in the aftermath of the election results.
Based on Morningstar’s valuation model, the S&P 500 is now more expensive than it has been 80% of the time since 2010.
Finally, citing recent analyses by Goldman Sachs, Smead highlighted that while short-term corrections may not be imminent, extreme valuations could dampen long-term returns. “You will not get rich from investing in the fourth huge financial euphoria episode in the last 100 years, in the S&P 500. You will get poor, you will not get rich”.
Original article published on Money.it Italy 2024-11-12 15:24:52. Original title: Mercati in bolla speculativa dopo la vittoria di Trump? “Disastro in vista”
