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Trump, black money and implications for stock prices (November 12, 2016)

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Smart money threatened a 10-15% single day drop in the US Market if Trump was elected and a one day 100 USD/oz upward movement in the price of Gold.   Well, Trump is king, the US markets have rallied and Gold has declined.  And new reasons are being offered why markets should trade higher.

 

Consider another anomaly.  High valuations in the US market – almost close to highest levels in history despite significantly lower growth – were justified by the very low bond yields.    Even as the 10 year US bond yields have moved up from 1.83% to 2.13% in a week,  the Dow has broken through its all-time high.

 

Perhaps behaviour akin to this is what lead Sir Isaac Newton to say “I can calculate the movement of heavenly bodies but not the madness of people”

 

What does Trump’s election or the crackdown on black- money mean for Indian markets in the short term?   The honest answer is I don’t know.   The battle between “Greed and Fear” rather than rationality drive short term prices.   As you can see with the examples above, you may as well toss a coin.

 

The long term investor has no reason to be worried but should see this as a buying opportunity.   Greed and fear drive first order thinking; however, if we slow down our decision making process, we can consider second/third order effects.

  • Trump and the developed world in general threatens to be protectionist as globalization has resulted in rampant inequality and a rant against it helps win elections.  However, it is not easy to wind down global supply chains overnight.  For example, India supplies over 40% of generic pharma supplies to the US market and Indian players have a significantly lower cost structure.   Reversing globalization will also mean higher costs for consumers.  And the electorate cannot have both.
  • Similarly, the crack down on black money should dent demand for discretionary consumption in the short term as people grapple with loss of their ill-gotten gains.  However, this should also result in lower inflation.  Any currency not deposited with banks reduces Govt’s debt to the RBI.   Everything else remaining the same, this means lower borrowing by the Govt.- both the above should mean more head room for lower interest rates.  Which means higher PE ratios.

 

In conclusion I would like to remind you that fear during market declines is very natural.  Our brains are wired for protection, not to take investment decisions based on risk and reward.    It is very tough emotionally to buy when markets are falling precipitously.  But history tells us that’s what winning this game is about.

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