by Clif Droke, Gold Seek: Heading into 2017, Wall Street was excited by the prospect of a U.S. president who sympathized completely with business. His promised tax and healthcare reforms were widely cheered by investors in the wake of his election. Yet the Congress has so far failed to deliver on those promises and investors are no longer giving the Trump administration a free pass based on the assumption that tax breaks are on the way.
This loss of enthusiasm is reflected in the long periods of dullness the market has experienced since March. While the bull market leg which began with the November election remains intact, the market has proceeded in a halting fashion and has gradually lost some of its erstwhile momentum. The following graph illustrates this principle.
Along these lines, a number of Wall Street economists have expressed the belief that if Trump’s promised reforms fail to materialize, the stock market’s current valuation precludes a continuation of the bull market. There are a number of reasons why this statement is likely false, however, not the least of which is that the market doesn’t need a political excuse to rally. Indeed, if that were the case then China’s equity market, in view of the country’s Communist government, would forever be stuck in neutral. The pace of innovation and productivity in countries with a market-driven economy is consistently high enough to always provide some justification for higher valuations and stock prices, regardless of the political climate.
Writing nearly 200 years ago, Alexis de Tocqueville observed that in America no matter how much the tax burden increased, American ingenuity and resourcefulness always found a way to counteract its malignant effect. He stated:
“It is certain that despotism ruins individuals by preventing them from producing wealth, much more than by depriving them of the wealth they have produced; it dries up the source of riches, whilst it usually respects acquired property. Freedom, on the contrary, engenders far more benefits than it destroys; and the nations which are favored by free institutions invariably find that their resources increase even more rapidly than their taxes.” [Democracy in America]
Tocqueville understood that America is unique among the nations in that its people and commercial spirit are strong enough to countervail even the most strenuous attempts by politicians at slowing commercial progress. This principle is as true today as it was then, perhaps even more so.
While many analysts are concerned by currently high market valuation indicators, the reality is that valuations can climb considerably higher before the market is in imminent danger of a bear market. The S&P 500 P/E ratio may be high at 26.13 by historical standards, it’s still a ways from those high levels in the late 1990’s/early 2000’s which preceded the death of the powerful ‘90’s bull market. Moreover, price/earnings alone isn’t a reliable measure of how undervalued or overvalued a market is. One must also take into account the investor sentiment backdrop, levels of participation among retail investors, and other technical and monetary policy factors when forming a final determination as to whether or not the market is truly “overvalued.”