Donald Trump is “not even wrong” about his stock market prediction.
That’s a pejorative phrase for arguments that can neither be proven correct of falsified. Trump is the master at making these types of statements.
You see, Trump used his favorite mode of communication recently, Twitter, to give his stock market prediction that the market would crash like we’ve never seen before if he’s voted out of office in 2020.
He may be right about a “crash.” He may also be right for the wrong reasons, though.
The market will crash again. Sometime. Given the fact that the run-up over the past 10 years has been historical and inflated by ultra-low interest rates, the downside will be huge. If history’s any guide, the pain during the next cycle will be brutal.
The thing is, it doesn’t really matter who’s sitting in the Oval Office, Trump or otherwise. Whomever takes the oath on January 20, 2021, is likely to experience a major butt-kicking.
The Real Factors For a Market Crash
Let’s look at a few factors that suggest the markets climbing higher at this stage is like drawing blood from a stone…
- Profit margins peaked. According to the massive hedge fund, Bridgewater Associates, profit margins for U.S. companies have been rising for 25 years. Without this consistent push higher, stock prices would be 40% lower than they are today. Over that time, the major drivers of improving profit margins included globalization, free trade, less worker bargaining power, and lower interest rates. Where do those things go from here?
- The big tax cut is in the books. One of the great things about accounting is the simple ability to do year-over-year comparisons. What helps a company one year – a “tailwind” – can become a headwind the next year. Take tax cuts. Lowering the tax rate juiced the bottom line for many companies. But that benefit is now gone. It doesn’t help the growth rate from one year to the next once the benefit’s been realized. There’ll be no similar tax boost anytime soon.
- Buybacks drove stock returns. In 2018, buyback activity for companies in the S&P 500 Index increased by 50% compared to 2017 to a new all-time high of $800 billion. Of course, if profit margins are peaking, there will be less cash flow in the future to buy back stock. Companies may take on debt to continue to reduce share counts and boost earnings per share. Is it the best use of cash? Buying back stock at all-time highs is a recipe for disaster.
- Valuations are at nosebleed levels. Across nearly every metric, the stock market is richly valued. For example, the price-to-sales ratio is near an all-time high. That’s a dramatic difference from the bargain-basement level near the 2009 lows. The price-to-book ratio right is showing top-10%-all-time readings. Price-to-earnings and dividend yield are only slightly less overvalued. All measures are in the top 15% of their respective all-time rankings. Sorry, folks, that’s not when the lowest-risk, highest returns are generated… at least not over the long term.
The Market Will Crash
So, yeah, Trump’s stock market prediction is right: The market will crash.
But it’s because the key drivers of this market cycle are reaching levels where it’s harder and harder to generate returns from here. Soon enough, people will catch on, and sellers will overwhelm buyers.
And it won’t make a tweet’s difference who the president is.