The coming Trump Administration - Are US stocks in danger of becoming overvalued?
- Trumponomics & you
- Gold - the next steps
- Investment ideas going into Q1 '17
US stocks have rallied significantly since Donald Trump was elected president, mainly due to his promises of increased fiscal stimulus through public infrastructure programs, with the stated objective of boosting inflation and economic growth. But have markets been overly enthusiastic about these proposals, considering he has not even been sworn into office yet? Markets seem to have been pricing in future annual GDP growth in excess of 3.5%, yet we know that structurally the US economy might only muster a meager 2% pa expansion due to the shift from a production to service orientated economy, the dismal rate of labour participation, and long-term savings trends. Further evidence is illustrated by the "neutral" recommendation of the S&P 500 ETF (the most common gauge of the US stock market), with relative valuation metrics all above 2, considered overvalued in many contexts. Adding fuel to the fire is a potential trade war with China. Infrastructure spending also requires widening the government deficit, something Republicans have been vehemently against and that the US simply cannot afford.
Gold - The next steps
Gold has significantly underperformed since the US election, mainly due to short-term speculation and appreciation in the US dollar. We think that, again, markets have reacted too extremely in such a short period, which could be leading to a bubble in the US dollar, which benefits no one in the long-term. We continue to hold the metal because we believe that real interest rates could be lower than expected, and to insure against the geopolitical risks stemming from the ascendance of right-wing populism in Europe, a massive threat to the future of the European Union.