Published April 04, 2017

This Dangerous Assumption Could Cost You Everything

By Justin Spittler

Animal spirits have come roaring back.

“Animal spirits” is a term that finance guys use all the time. It refers to the human emotion that drives consumer confidence.

When animal spirits are weak, people are fearful about the economy.

When they’re strong, people are excited about the economy.

I’m telling you this because Donald Trump has awoken the market’s “animal spirits.”

Just look at the chart below. It shows the Conference Board Consumer Confidence Index since 2000. This index measures how confident everyday people feel about the economy and their own finances.

You can see that consumer confidence soared after Trump won the U.S. presidential election on November 8. It’s now at the highest level since 2000.

• This might seem like a good thing…

A lot of folks might even look at this chart and think that now’s a good time to buy stocks.

But that’s a very dangerous assumption.

You see, you don’t want to buy stocks when everyone else is buying them.

You want to buy stocks when everyone else is selling. That’s how you get the best deals possible.

Warren Buffett, arguably the greatest investor of all time, sums it up best:

Be fearful when others are greedy and greedy when others are fearful.

And right now, investors aren’t fearful. They’re fearless.

This is why you should be nervous that consumer confidence is soaring…not excited by it.

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• To be clear, I’m not saying that U.S. stocks are about to crash like they did in 2000…

But I do encourage you to use extreme caution.

Here’s why…

Investors loaded up on stocks because Trump’s a businessman.

They’re betting that he will do things that are good for the economy, jobs, and everyday Americans.

Now, fewer regulations and lower taxes would obviously help the economy. But there's something most investors are overlooking…

• Trump can’t get anything done right now…

Take health care.

During the presidential campaign, Trump promised to repeal and replace Obamacare.

But he can’t even get “Trumpcare” through the House of Representatives right now.

Trump has also failed on trade reform.

As you may know, Trump thinks America is getting screwed on trade. He promised to rip up all of America’s bad trade deals and replace them with something that puts “America first.”

But that hasn’t happened yet, either.

In fact, it actually looks like Trump could take a soft stance on the North American Free Trade Agreement (NAFTA)—a trade agreement between the United States, Canada, and Mexico that Trump previously called “the worst trade deal” ever signed by the U.S.

Now, Trump could eventually get these things done.

But investors didn’t price in "eventually."

They acted like he would clean house overnight.

It now looks like it could be a long time before Trump “makes America great again.”

• To be fair, this isn’t all Trump’s fault…

You see, the Democrats hate Trump.

They want to make his life a living hell.

So, they’re going to challenge him on every issue and try to block every move he makes.

If Trump can’t figure out how to work with Democrats, he’s going to have a tough time doing anything.

And that could cause investors to rethink everything about him.

If that happens, consumer confidence and stocks could plunge.

• The good news is that you can still protect yourself…

You don’t have to sell all your stocks, either.

Here’s how to stack the odds in your favor…

Avoid risky stocks. Right now, there’s a lot of uncertainty surrounding Trump. So don’t gamble on unproven or gimmicky companies like digital camera company Snap Inc. (SNAP) or fitness bracelet maker Fitbit (FIT).

You should also avoid passive funds. These are funds that track major indexes like the S&P 500 or the NASDAQ.

Mom-and-pop investors love these funds because they allow you to buy stocks without thinking. They’re a “shotgun” approach to investing.

This mindless investing strategy has worked in the past. But it won’t work nearly as well going forward.

That’s because U.S. stocks are very expensive. The S&P 500, for instance, trades at a cyclically adjusted price-to-earnings (CAPE) ratio of 29. That’s 73% higher (more expensive) than its historical average.

• To make solid returns these days, you’re going to have to pick your stocks wisely…

I recommend you pick up some “consumer defensive” stocks if you haven’t already.

These companies sell stuff like toilet paper, shampoo, and milk. They’re durable businesses that can make money in just about any environment.

Plus, they’re relatively cheap. According to GuruFocus, consumer defensive stocks are trading at a CAPE ratio of 23.20 right now. That makes them about 20% cheaper than the average stock in the S&P 500.

It also makes them great investments in this uncertain environment.

Regards,

Justin Spittler
Delray Beach, Florida
April 4, 2017

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