It has been one year since President Trump was sworn in as the 45th President of the United States and as far as the stock market is concerned, it has been a record setting year. While there have been bumps in the road for the administration, I am only talking about the stock market here.
First, since January 20 of last year, the S&P 500 is up 23.2 percent. The Dow, S&P 500, Nasdaq Composite and Russell 2000 are all at record highs. Today is also the day that marks the record for the longest stretch in history without a correction of at least five percent for the S&P 500. The stretch has now reached 395 days.
While we may never get a Republican to give Obama any credit and we may never get a Democrat to give Trump any credit, the fact of the matter is that the market did really well under each of them. Consider that in the first year of President George W. Bush’s first term the market was down 16.3 percent and in the first year of President Clinton’s first term, the market was up a little less than 10 percent.
The rally on the market has allowed other records to be set. The SPDR S&P 500 was launched 25 years ago this month as the first U.S. based ETF and it is also at an all-time high. Unfortunately it is setting other records as well. The 10-month RSI is the highest it has ever been.
President Trump’s greatest legislative accomplishment in his first year was the new tax bill and we are starting to see some of the effects of lowering the tax rates. Companies are starting to announce plans on how they intend to spend the new-found profits and that has pushed stocks even higher in the last month or so.
The euphoria over the approval of the tax bill by investors has led to another record. The Investors Intelligence Sentiment Survey from earlier this week shows that 66.7 percent of newsletter advisors are bullish, which is the highest reading since 1986. The bearish reading came in at 12.7 percent which is the lowest reading since April ’86. This puts the ratio of bulls to bears at 5.25 to one.
While I wasn’t able to go all the way back to the beginning of the sentiment survey to see if this is an all-time record for it, I can tell you that the 5.25:1 ratio is the highest reading in at least 31 years.
Another indicator that I was looking at, but was unable to confirm if it is at an all-time high or not was the Consumer Confidence Index, specifically the Present Situation component. The reading for December was 156.6 and that is the highest reading going back at least 17 years to 2001.
While my contrarian nature makes me cautious about the market with the record overbought reading, the extreme optimism reading from Investors Intelligence, and the extreme high in consumer confidence, the momentum is still to the upside. This momentum could go on for a while still, but you should have a plan of some sort.
Eventually we will see a correction, it could be five percent, it could be 10 percent, or we could enter a new bearish phase in the market. Eventually it will happen and you need to be prepared when it does. When I think about protecting yourself from a downswing in the market, I think back to 2000-01. I was working at Schaeffer Investment Research and it was my first job in the investment publishing industry. I remember talking to an investor that was trying to figure out what to do with his shares of Yahoo. I don’t remember the exact numbers, but the conversation went something like this.
- Investor: “I bought shares of Yahoo at $60 a share.”
- Me: “That’s great. What price did you sell at?”
- Investor: “I still own them and I am trying to figure out what to do.”
- Me: “The stock was up above $400 and you didn’t sell any of it?”
- Investor: “No, I didn’t want to sell it when it was up that high because I didn’t want to pay the taxes on the gain.”
- Me: “So why not sell them now?”
- Investor: “I don’t want to sell them now at a 25 percent loss.”
Like I said, I don’t remember the exact numbers, but this is the gist of the conversation. He didn’t want to sell when it was high because of the tax consequences and he didn’t want to sell low and take a loss. The stock continued down and ended up hitting a single-digit price in late 2001.
You can’t be like that person was, you have to have a plan. It doesn’t matter whether you use a stop loss, a moving stop, a moving average crossover, or a set target. Too many investors have a plan or strategy when buying investments, but don’t have a plan for getting out.
Devise a plan of some sort that you will get out of your investments at a certain point. At some point, the market is going to go through a correction or enter another bearish phase and you have to be prepared.
Editor’s note: The author writes for Bull Market Rodeo, one of the premier financial websites in America.