Trump Took Office. Stocks Rose. Investors Are Still Worried. – New York Times

Wealth Matters

Some of President Trump’s least controversial tweets involve him boasting about the stock market. It has certainly done well since he was elected a year ago, with the Dow Jones industrial average up more than 30 percent in that time.

On Thursday, the Dow hit a milestone when it closed above 24,000 for the first time, prompting Mr. Trump to take to Twitter again. “Stock Market hits new Record High. Confidence and enthusiasm abound,” he wrote. “More great numbers coming out!”

Few would have predicted a year ago that the market would do so well. Investors who had the fortitude to stay in have benefited mightily by the increase. But the wary ones put their money in more secure assets.

Right before Mr. Trump was elected, I wrote a column on what a Trump presidency would mean for the economy. Most of the people I interviewed were nervous, and they were making defensive moves in their investments — away from equities and into hard assets like real estate — or putting plans in place to weather a downturn.

Michael Sonnenfeldt, a New Yorker who made his fortune in real estate, is the chairman of Tiger 21, an investment club for very wealthy people. When I talked to him last year, he revealed the uncertainty investors were facing.

“The combination of potential interest rate shocks and a China implosion and the geopolitical situations with Russia, China, Iran, the Middle East, ISIS, and the difficult political situation in the U.S. with the most challenging, strangest presidential election we’ve had in our lifetime — it all adds up to many generic concerns,” he said at the time.

So how did the market rocket past expectations, and how should investors plan for 2018?

Mr. Trump is not unique among presidents for taking credit for a strong stock market and the broader economy. Most do it, if they can — just as surely as they try to skirt responsibility when there is a slump.

But the last 12 months of great returns lack the euphoria a person might expect after an increase in the Dow of nearly 30 percent.

Advisers say that is because many individual investors remain afraid that the eight-year bull market is going to collapse, while others struggle to separate Mr. Trump’s harsh political language from the strong fundamentals of American companies.

Individual investors are still seeking safe havens. One measure is bond funds, assets that help defend against a downturn. According to Yardeni Research, money continues to flow into bond funds.

“We’ve had a year of record-low volatility, strong returns and strong macroeconomic indicators,” said Michael O’Sullivan, chief investment officer for international wealth management at Credit Suisse. “But politically — we’re in a political recession. People have difficulty squaring the two.”

The firm’s global wealth report, released in November, showed that the world had grown wealthier in the last 12 months and not just at the top of the economic pyramid.

“The markets are focused very much on the business cycle, which is picking up,” Mr. O’Sullivan said. “That’s been a positive surprise, given how badly many people would have said the economy would have fared.”

In other words, the stock market is rising not because of Mr. Trump but in spite of him.

“Our view continues to be that politicians are not as important to investing as they would like investors to believe,” said Richard Bernstein, chief executive and chief investment officer of Richard Bernstein Advisors, an investment advisory firm. “That’s always been our working model.”

Mr. Bernstein said corporate fundamentals remained strong. “Corporate profits remain healthy, liquidity remains abundant, and investors generally remain scared of stocks,” he said.

If presidential tweeting has not been driving the stock market, what should individual investors look for in equities? Analysts said investors should start by separating the political noise from the signals companies were sending out.

For one, any corporate tax cut is not necessarily a short-term gain for the stock market. Edward J. Perkin, chief equity investment officer Eaton Vance, said a tax cut could actually result in a short-term drop in stock prices. And the companies that have been driving the stock market’s growth, like health care and technology companies, will not benefit as much from a tax cut as smaller, domestic companies that had not been able to take advantage of the loopholes and deductions under the current tax system.

Other analysts argue that the prospect of tax cuts ceased being a factor in this rally a few months into Mr. Trump’s presidency, when he and the Republican Congress failed to repeal the Affordable Care Act.

“Corporate tax cuts are not priced into the market, because there is still skepticism toward the legislative process,” said John Lynch, chief investment strategist at LPL Financial.

For 2018, analysts are predicting that the stock market will continue to do well but with greater swings.

“I always love corporate profits,” Mr. Lynch said. “We can all get really geeky with these valuation measurements, but if you think about it, we have record profits growing slightly above historical rates. The Fed is tightening policy, and we’re still growing. That’s a pretty good recipe for equity investors.”

Anthony Roth, chief investment officer of Wilmington Trust, said one difference in his strategy was a plan to use more active managers who pick stocks and to cut passively managed index funds. He said Wilmington Trust’s research showed that active managers were outperforming the market as a whole.

Or put another way: The skill that an active manager has is valuable in an environment when tweets about politics and people rattle less sophisticated investors.

Today, Mr. Sonnenfeldt said, he and the 580 members of Tiger 21, who have an average net worth of about $100 million, have nearly three-quarters of their money in private equity, real estate and publicly traded stocks.

Over the last year, he said, the group’s concern has not been with the political environment but with interest rates and wondering how long they will stay as low at they are. The group remains bullish on the advantages that American businesses have, like lower energy and transportation costs, over competitors in other countries.

So what could end the stock market’s run?

CTBC Bank USA put that question to affluent investors in California, New Jersey and New York, all blue states that would be affected by a loss of deductions for state and property taxes. The poll found that they remained confident about the economic and investment landscape, but that they feared a political threat like a conflict with North Korea or a large terrorist attack in the United States.

“The only thing we worry about is this geopolitical risk,” said Noor Menai, president and chief executive of CTBC Bank USA. “Nothing gets amplified. Markets take it in stride.”

Yet Mr. Menai said seasoned financial services professionals and institutional investors had a distinct advantage over individual investors.

“We’ve been through three crises over the past 25 years, and each time the market has reconstructed itself,” he said. “Over time, the insiders such as me have come to understand what the hype is versus what can happen.”

But individual investors do not have that knowledge. They still get scared about investing in a rising stock market because they fear it’s going to collapse. When that happens, said Judith Ward, a senior financial planner at T. Rowe Price, she asks clients to focus on what they can control.

For example, if they are near retirement and cannot weather a 20 or 30 percent drop in their assets, she said, they should invest more conservatively.

“There is anxiety and uncertainty about the political climate, but my sense is people are looking at their personal situation and asking how is all of this going to impact them,” she said. And that, she said, can be summed up in one question: “How long can this bull market last?”

I’ll bet you won’t find that answer in a tweet.

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