Full of bull: Donald Trump and the stock markets

Presidential election polling day in the US today marks the end of a campaign that will long be remembered for Donald Trump’s bluster and balderdash. Trump’s many exaggerations were not confined to politics; but when it came to financial markets, investors, rightly, tended to take his pronouncements with a pinch of salt.

On bubbles

Trump likes to talk of market bubbles – a lot. At a campaign rally in January, he said: “By the way, speaking of stock. You see the bubble, a little bubble. It’s starting to go a little bad. Some bad numbers are coming out. Some really bad things. And you better be careful.”

A month later, he warned of a “big, fat, juicy bubble”. He repeated his bubble thesis during the first presidential debate on September 26th, saying markets would “come crashing down” if rates are raised “even a little bit”, saying the US is “in a big, fat, ugly bubble”.

Many investors are wary of stocks due to seemingly elevated valuations, but even market bears like GMO's Jeremy Grantham generally agree equities are not in a bubble. Grantham has noted that the irrational exuberance that characterises market bubbles has been absent during the current cycle, and surveys consistently show muted sentiment amongst both institutional and ordinary investors.

Some valuation metrics, particularly the cyclically adjusted price-earnings (Cape) ratio popularised by Nobel economist Robert Shiller, indicate valuations are steep, although both Cape and other valuation measures are roughly in line with 25-year averages. The S&P 500 was flat in 2015 and has gained 7 per cent in 2016, not the kinds of returns associated with bubble environments.

In short, there’s little evidence that stocks are in a “big, fat juicy bubble”.

On being a stock market saviour

In August, Trump warned that “very scary scenarios” lay ahead for stock market investors. However, he was more optimistic when asked how markets would respond to a Trump election win, saying: “I think it’s going to go great.”

Investors disagree. In Merrill Lynch’s latest monthly fund manager survey, a Trump victory was cited as one of the biggest tail risks facing global markets. This trepidation is borne out by market action, with stocks bouncing nicely during the aforementioned September 26th presidential debate, when Trump’s election odds took a turn for the worse after his poor performance.

A recent academic study that analysed that market reaction concluded major markets would likely fall 10 to 15 per cent should Trump win the election. More recently, stocks skidded after the FBI said it was reopening its investigation into Hillary Clinton’s use of a private email server during her tenure as US secretary of state.

If Trump does upset the election odds, stocks are much more likely to take a short-term hit than to “go great”.

On the Federal Reserve

Federal Reserve chief Janet Yellen is unlikely to stay on should Trump become president, given his recent appraisal of her performance. The Fed is creating a "false economy", he said in September, keeping rates "artificially low so that Obama can go out and play golf in January and say that he did a good job". Yellen "is being more political" than Hillary Clinton and should be "ashamed of herself".

Such criticisms are unprecedented from a prominent presidential candidate, given there has long been bipartisan support of the idea that the Fed is an independent, impartial actor.

Ironically, Trump was singing a different tune in May. Then, he said he had a “very high regard” for Yellen, adding: “She is a low-interest rate person, she has always been a low-interest rate person, and I must be honest – I am a low-interest rate person”.

On stock-picking

Trump’s fortune is largely derived from his property investments, although he has also indicated he has the Midas touch when it comes to stock-picking. In his 2015 book Great Again: How to Fix Our Crippled America, Trump said he recently “did well in the stock market”, even though it “isn’t something that I’ve focused on in the past”. Writing about his 2014-15 finances, he said 40 of 45 stocks purchased “rose substantially in a short period of time”.

Not everyone is convinced, judging by a Bloomberg article titled Donald Trump the Stock Picker Boasts Gains That Nobody Can Match. It cited analysis from Evercore ISI which examined the holdings of some 670 institutions that had held 20 to 50 positions in data going back to 2011. ISI found Trump's success with 40 out of 45 stocks was a better strike rate than that achieved by 97 per cent of institutions in the first quarter of 2015 and better than every single institution in the second and third quarters.

If Trump’s success was achieved in 2014, his performance would have been better than 98 per cent of funds, said ISI.

The Bloomberg analysis is laced with healthy scepticism, although it is entirely possible that Trump did score with 40 out of his 45 picks. While his book makes no reference to when his stocks were purchased, an earlier press release from his presidential campaign team contained similar boasts regarding 45 stocks sold by Trump in January 2014. Stocks enjoyed a bumper year in 2013, with the S&P 500 soaring 32 per cent, while the index also bounced nicely in 2012, rising 16 per cent.

The problem is we don’t know what Trump means when he says his purchases jumped “in a short period of time”. If his 40 stocks soared over a three-month period, then it appears he outperformed almost every money manager on the planet. If he is referring to, say, an 18- or 24-month period, the picture is very different – indeed, he might even have underperformed indices.

In other words, it’s wrong to assume Trump is guilty of idle boasts and exaggeration in this instance: he may be simply confusing brains with a bull market.

On timing

Trump is equally confident in his market-timing skills. Earlier this year, he referred to those aforementioned stock sales in January 2014, saying: “I bought them low and I sold them high.” It was “very good timing. I hit the market exactly perfectly”.

It is possible, if unlikely, that Trump somehow caught the top in each of those 40 stocks, although it’s hard to argue he “hit the market exactly perfectly”; including dividends, the S&P 500 has risen 25 per cent since then.

In August, he said he had exited the stock market. “I did invest and I got out, and it was actually very good timing,” he said. We don’t know exactly when he “got out”, but again, it’s difficult to say how it could have been “very good timing”, given that stocks have been near all-time highs in recent months.

His aforementioned warning about stocks being in a “big, fat, juicy bubble” was uttered on February 8th – the very day markets bottomed, prior to a 15 per cent advance.

Trump did give more responsible advice during the August 2015 market downturn, saying investors had “taken a big hit” and “are better off holding”. Still, he couldn’t resist boasting about his timing know-how. “I would have said sell, if you asked me this question three or four weeks ago,” he said. “I had a feeling things were bad.”

On the 1990s “depression”

Trump attracted much criticism following last month’s New York Times report alleging he had posted a loss of $916 million in his 1995 tax returns, a loss that may have allowed him to legally evade federal income taxes over the next 18 years.

The uproar about the ethics of such a move did not appear to bother Trump, who responded by saying he “brilliantly used” US tax laws to his advantage. Questions regarding his business acumen stung him, however, prompting protests about the difficulties of doing business during “one of the most brutal economic downturns in our country’s history. If you remember the early Nineties, other than I would say 1928, there was nothing even close”. It was “an economic depression”.

Actually, the 1990-91 recession was a comparatively mild one that lasted eight months. There have been 10 recessions in the US since the Second World War, with eight resulting in bear markets. This was one of the two exceptions, with stocks declining by a relatively modest 19.9 per cent.

In contrast, stocks declined by 86 per cent following the 1929 crash; by 48 per cent during the 1973-74 downturn; by 49 per cent during the dotcom crash; and by 57 per cent during the 2007-09 global financial crash.

Such comparisons may be beside the point. After all, this is the man who once said his net worth fluctuates “with markets and with attitudes and with feelings, even my own feelings”. The early 1990s downturn may have felt like an “economic depression” to Trump; for him, those “feelings” – not the facts – are all that matters.