The US stock market has been on a roll ever since Donald Trump secured his shock US presidential election victory as investors gamble that "Trumpflation" will fire up the global economy. But what if his stimulus blitz turns out to be a dud?
Right now, the US is flying, with the S&P 500 climbing for eight consecutive calendar years, its second-longest annual winning streak ever. A positive 2017 would match its best-ever run, which was from 1991 to 1999. However, this must be the most unloved bull run ever, because investors have moaned, carped and predicted disaster every step of the way.
But here we are, eight years on, and the S&P 500 stands at 2,378 and Dow Jones at 20,901, after topping 20,000 for the first time in January. That won't stop the carping -- quite the reverse. Investors get vertigo when markets are flying and, as always, there are reasons to be worried.
First, Trump has to get his budget through Congress. It may have a Republican majority, but it won't simply wave it through. Plans to boost military spending by 10% could run into statutory budget caps, designed to stop the US breaching its debt ceiling. Other elements of his stimulus plan could fall victim to horse trading (although tax cuts are surely baked in). There is plenty of scope for disappointment.
Another concern is that markets are now overvalued, with the average P/E ratio on the S&P 500 at a multi-year high. The Federal Reserve is expected to hike interest rates at least twice more this year, which could partly offset any Trump stimulus. Bond yields will rise, luring more investors away from equities. The Donald could be paving the way for a massive disappointment.
Investors in the UK are closely tied to the fortunes of the US stock market, so what should British investors be doing about it? The answer is simple: absolutely nothing. Nobody can predict a stock market crash, although that does not deter many highly qualified and highly paid analysts from trying. You will probably get your timing wrong, and watch helplessly as markets climb higher.
Hold on tight
Also, you will rack up needless trading fees, then face the tough question of when to buy back into the market. Plus you will miss out on dividends while out of the market. Provided you plan to hold for at least five years or longer, all you can sensibly do is tough it out. You should also check your portfolio is properly diversified, with exposure to different companies, regions, sectors and markets.
Remember, people have been warning of a crash since the last one in 2008/09, during which time the UK stock market has doubled, and trillions have been paid to investors in dividends. At some point, there has to be a pullback. Maybe Trump will unwittingly trigger it. Perhaps the Chinese credit and property bubbles will burst. Something will check this bull run. Markets do not climb forever.
Carry on investing
When the crash does finally come your response is also simple: buy shares at the new reduced price then sit back and wait for the recovery. It always comes.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.