Three Simple Questions on the Markets, Part I

We asked a group of the region’s leading wealth managers to pen a response to three questions about the markets and how they approach current conditions. Here are their responses to the first question: Since the election of Donald Trump, stock markets have soared and the confidence of consumers and investors has risen. How real is the Trump Bull Market and how should investors play it?

H. Scott Cunningham, PNC Wealth Management: The current bull market is very real… and, has been very real since it began during March 2009! Stock market valuations are driven by corporate earnings. During the 1st quarter of 2017, the estimated earnings growth rate of the S&P 500 stock index was 8.9%. Investors bought stocks understanding that earnings were up. Moreover, investors who continue to buy stocks are projecting that the “pro-growth” policies expected from the new administration will continue to grow corporate earnings. The best way to play this market is to actively manage one’s portfolio: plan an investment strategy, identify your individual needs and risk tolerance, and select investment vehicles consistent with that plan.

Joseph Scarpo, Private Wealth Advisors: Short-term market swings are driven by traders. Traders focus on events and move money accordingly. The election of President Trump provided traders with the belief that regulations would be minimized, taxes would be reduced and corporate profits would improve. The result was an opportunity to push markets higher. Investors focus on longer-term economic fundamentals and recognize that over time economic conditions go through periods of prosperity, as well as periods of recession. Investors understand that an improving economy results in market appreciation. The rally is real because traders believe profits will improve. The key for investors is to stay focused on the long-term prosperity of the country.

Jack Kraus, Allegheny Financial: The Trump Bull Market is currently built somewhat on anticipation of policy changes, especially around corporate tax cuts. Other factors such as reduced regulation and increased infrastructure spending are part of the increase in optimism. The market will be watching to see what will become reality, the timing of any new policy, and the effect on the bottom line of companies. What the corporate tax cuts will be, along with their timing, will surely be scrutinized by the market. Other potential policies and their effect will also be watched. For example, will domestic companies that manufacture outside of the U.S. but predominately sell here be penalized? My prudent suggestion to investors is to maintain a globally diversified portfolio that is appropriately invested in stocks and bonds according to their risk tolerance.

Jeff Muhlenkamp, Muhlenkamp & Company: If the increased confidence we have seen in consumer, business, and investor surveys translates into greater spending, investing, and hiring, the economy will improve and validate the “Trump Bull Market.” In order for consumers and businesses to make those decisions they’ll probably need to see follow through on promises made during the campaign, mostly dealing with taxes and regulation. How to play it? The same way investors should always invest. Hold companies that are doing well and you think are undervalued or fairly valued, sell companies whose price is greater than your opinion of their value or whose business encounters long-term problems and reinvest those proceeds in undervalued companies if you can find them. If you can’t find good values now, wait, they’ll come.

Robert Y. Kopf, Jr. Smithfield Trust Company: While the “Trump Bull Market” appears to be real (at least in the short-term), we feel that investors should not “play it.” The prudent investor should stick to his or her pre-existing asset allocation decisions and periodically rebalance to those asset allocation metrics.

Mike Kauffelt, II, Bill Few Associates: I think this bull market since the election is real, but very much ahead of itself. The campaign promises of lower regulation and taxation is very good for business: thus stocks of businesses would expect to do better. However, this short-term increase in the U.S. stock markets is still based on what we think will happen. Up until early April nothing significant has been passed by the President or Congress that is different from the status quo before the election. If nothing significant changes in the future, this stock market may have to surrender some of the recent gains.

Elizabeth Genter, Schenley Capital: The start of the Trump Presidency has been marked by good economic data and a high degree of confidence. Fortunately, fundamentals drive the market, not the press. Corporate earnings are transparent, measurable and directly relevant to market prices—whereas, the political process, with its total lack of transparency, defies accurate reflection in securities pricing. Earnings are accelerating and are at their highest levels in five years. Historically, tax rate cuts have been enormously successful ever since the Federal income tax was enacted in 1913. The combination of accelerating fundamentals, Trump’s pro- business message, potential tax cuts and investor confidence could put a new spring into the step of this bull market. A scenario which should benefit from diverse portfolio of U.S. equity investments.

Linda Duessel, Federated Investors: As a forecasting mechanism, the market naturally bid itself up after Republicans—campaigning on a pro-growth, business friendly agenda—swept both the White House and Congress for the first time since Eisenhower in 1952. While there have been some hiccups, I don’t believe House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell are going to let this historic opportunity slip through their fingers. Whether complete tax reform or simple tax cuts, whether businesses first and then individuals or vice versa, whether it takes longer than anyone expects as it always does in D.C., lower taxes are bullish for earnings, the markets and economic growth. With no recession on the foreseeable horizon, investors should play it by being invested in stocks.

Christopher Martin, Northwest Savings Bank: Infrastructure spending, tax cuts, and deregulation have pushed stocks higher as investors are anticipating stronger economic growth over the next four years. Lower tax bills and deregulation could also drive corporate profits higher. Market performance through the tail end of 2016 and the first quarter of 2017 has been driven by expectations. In order for the rally to continue, however, reality has to meet or exceed those expectations. If policy reality falls short of what is currently priced into the market, stocks could experience a pull back as a result. Looking ahead, our view is for a more market-friendly environment, but there may be reason for caution if spending and tax cut policies fail to meet expectations.

Michael Lynn, Hampton Wealth Management: The markets have been “romancing the new paradigm” with prices baked to perfection. At Hampton Wealth Management, we specialize in protecting the downside by quietly focusing on hedging left-tail risk. This can be vividly illustrated with a wide variety or risk-management and risk-control techniques using risk profiling and stress test software. While asset allocation and reduced correlation cannot ensure profit or protect against a loss, an Endowment-style approach can provide more consistent risk-adjusted returns through a full market cycle, regardless of policy uncertainty, and whether or not political expectations become economic and financial reality.

Peter F. Mathieson, Fairview Capital Investment Management: Only after time passes and we can reflect back on history will we be able to determine if the “Trump Bull Market” was “real.” Equities certainly have enjoyed a decent stretch in these first several months since the election. However, that’s an inconsequential timeframe in the context of the multi-year investment planning horizons that we craft with our clients. Investors should “play” this administration as they would any other: live within your means, share your good fortune with others, and don’t take any wooden nickels.

Find more answers by reading “Three Simple Questions” in our Summer 2017 issue or online here.