You might be feeling optimistic about the stock market now that President Trump is in office. Most of my conversations this week have had an optimistic tone. But what does that mean for stocks? Let’s look at what we know. When President Obama took office during the housing bust, he inherited a stock market that saw the Dow Jones Industrial Average plumbing the depths at 7500. It was an ugly time to be sure, but looking back from an investor’s standpoint, the market was at a much more attractive value than it is today. That doesn’t mean the stock market can’t go up from here as Trump gets to work. It most certainly can. But it’s much more expensive today than when Obama took office, plain and simple.
One of legendary investor Warren Buffett’s (politics aside) favorite stock market metrics is market cap to GDP—a measure of the stock market value compared to what the country is actually producing. Again, from this perspective, when Obama came into office it was pretty attractive (lower is better for an investor). And today? It has more than doubled thanks to a weak GDP recovery and soaring stock prices. Even the blind squirrel finds the nut.
So what does this mean to you? You need a little perspective. You need to spend some serious time understanding your situation. No president can understand that better than you. Don’t let optimism outweigh the reality of what your portfolio can handle, in terms of losses, and you will realize the success you deserve.
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