Paradox: A statement or proposition that seems to derive from sound reasoning but leads to a senseless, logically unacceptable or self-contradictory conclusion.
Is there a Trump rally paradox? The guy that everyone feared would destroy Western Civilization has been elected president. The person that the markets feared the most has become their darling as the Trump rally drives prices up. The New York Times looks at an awfully expensive stock market since the start of the Trump bump.
They are saying the Trump administration will be good for corporate profits, and hence the stock market is way up. (The Standard & Poor’s 500 is up 6 percent since Election Day). It will also mean higher interest rates and inflation over time. (The yield on 10-year Treasury bonds has risen to 2.6 percent from 1.85 percent in the same span.)
But the result of those two shifts should make anyone thinking of investing in the stock market nervous. You’d be counting on the profit-boosting elements of the Trump agenda being enacted and the profit-hampering possibilities not materializing. Another way to think about it: Putting money into the stock market right now means accepting less compensation for taking on risk than was available before Election Day.
Successful long term investors demand increased compensation for taking on higher risk. In the investing book A Random Walk Down Wall Street the writers explain that a basket of high risk stocks provides a better return over time that a basket of blue chips. This is because investors are only willing to pay just so much for a risky Stock. The profit in high risk stocks is buying enough of them that the losers are balanced off by the winners. This applies to buying stocks versus bonds as well. But what if the market is crazy? This is what happens prior to market crashes. Prices are driven up by unbounded optimism and greed. And payment for these investing sins is loss of capital as the market crashes. As excited as investors are about tax breaks, stimulus spending and repatriation of offshore capital none of that has happened yet and if it does there is no guarantee that it will work! The tax breaks of the early 2000’s led to the market crash of 2008! Is there a Trump rally paradox? We believe so. So, what can you do?
Investing in the Era of Trump
The Slate looks at how to invest your savings in the Trump era.
How should a Trump presidency affect the way you save and invest? If Trump has changed anything, my friend argued, it’s that diversifying your assets internationally is more critical than ever. The argument for investment in different companies or industries applies equally well for diversifying investments across countries. You can get rid of some of the U.S. market-specific risk by diversifying internationally.
Years ago we wrote about trading offshore stocks.
There can be a lot more to stock trading than trading homegrown stocks. One useful approach is to find companies that work offshore. Another viable option is directly trading offshore stocks. The easiest way to do this is with American Depository Receipts, ADR’s. You can profit from trading offshore stocks that are listed on the New York Stock Exchange as ADR’s. An ADR is a negotiable security of a non-US based company which trades in United States markets. Such stocks are denominated in US dollars and, when they pay dividends, pay in US dollars. When trading offshore stocks via the ADR route an investor avoids the risk of dealing with a foreign stock exchange and dealing in a foreign currency.
Yes, there is a Trump paradox and your friend and ally in this dilemma is onshore and offshore diversification.
