Strap yourself in … the Trump trade is on, and everything is going up.
The day after Donald won the election, the US stock market surged 1,500 points – the biggest post-election gain in 128 years.
Even better, Trump says we should be preparing for a ‘golden age’ of investing returns as he slashes corporate taxes and loosens up those annoying rules and regulations for his billionaire buddies.
MAGA!
However, there’s another billionaire who’s been doing the exact opposite … he’s been selling down his holdings as share prices climb.
Even worse, that billionaire just so happens to be none other than Warren Buffett, the greatest investor in history.
What’s going on?
Well, Buffett famously doesn’t try to time the market, and he pokes fun at anyone who believes they can. However, he does have a valuation yardstick that lets him know when the market is out of whack.
It’s called the ‘Buffett Indicator’, and it takes the total capitalisation of US stocks and divides it by US gross domestic product (GDP). The idea being that if stock prices rise faster than the economy grows then it may be a sign of a bubble.
The Buffett Indicator flashes warning signs to investors when it surpasses 100%.
As it did at the height of the Dot.Com bubble.
… and before the Global Financial Crisis.
… and at the beginning of the Covid crash.
So where is it sitting today?
208%.
That’s the highest it’s ever been (“HUGGGE” in Donald Trump language).
In other words, the Buffett Indicator is screaming “SELL”.
And that’s what Buffett has been doing. He’s been stockpiling record amounts of cash, presumably to allow him to once again be “greedy when other people are fearful” (which is how you become one of the richest people on the planet).
Okay, so by now I’ve probably thoroughly confused you.
Which billionaire should you believe?
Well, I’m inclined to believe both of them … though I think Buffett will win out in the end, if for no other reason than he generally does.
Let me be clear: stocks could (and probably will) rise from here.
However, in the long run share prices always revert to their long-term averages, which means there’s a possibility that returns over the next 10 years are not as likely to be as good as those of the last decade.
Right now, few investors are thinking about what may be lurking around the corner.
Case in point: The share market is not only at record highs, but the latest US Consumer Confidence figures show that investors strongly believe that stocks will continue powering ahead. In fact, investors haven’t been this confident that stocks are a no-brainer since (checks notes) …
… since 1987, when stocks savagely plummeted 25% in a single day.
Still, as I said a few weeks ago, history has proven that it doesn’t matter who is in the White House. What matters is that you hold through both the good ride (like today) and the inevitable crash.
Buckle up!
Tread Your Own Path!