The “Trump Bump” will soon come to an end, and earnings will once again drive stocks higher or lower. Bulls think 2017 S&P operating earnings could hit $130 per share. Who knows if this happens? Even in times of relative stability, it’s foolish to predict the markets—and probably the only thing everyone can agree on these days is that our current situation is far from stable. There are too many variables, including uncertainties about the policies President-elect Trump will put forward, to have any clue where the market will wind up at year’s end. Will Trump succeed in cutting the corporate tax rate or start a crippling trade war with China? Will he “repeal and replace” the Affordable Care Act or throw the whole healthcare sector into chaos? Your guess is as good as mine, and anybody who claims to know is probably a partisan hack or a salesperson, or both.
One thing we can be sure of is that, as always, a handful of big movers will disproportionately impact the indexes in 2017. Last year Nvidia was that stock. I wish I knew what this year’s breakout name will be, but all I can offer with some certainty is that even if the indexes post another year of low double-digit increases, more stocks will struggle than flourish. Quite a few businesses could vanish altogether. Avoiding these laggards and soon-to-be zeroes is just as important to investing success as scouting for potential five or ten baggers. And one of the best ways to do so is to identify larger secular trends.
Last week it was widely reported that regulators slapped a $43.5 million fine on multiple investment banks for passing off overly positive research analysis on the now private retailer Toys R Us. They did this hoping to curry favor with the current owners of Toys so that the company might pick those Wall Street firms as bookrunners for a possible Toys initial public offering.
I was shocked to hear this. Not shocked because news broke that some purportedly objective research from Wall Street turned out to be bogus, but because that is news at all. By now, I figured everyone–and I mean everyone–knew that recommendations from Wall Street always have been and always will be skewed at best and flat-out misleading at worst.
Two major events took place this past week in the financial world. First, news came out that finance is about to become the largest industry in the S&P 500 again. The last time that happened was May of 2008. We all know how that movie ended. Second, government regulators actually managed to, get this, regulate someone on Wall Street. They indicted the massive $14 billion SAC Capital hedge fund for insider trading “on a scale without known precedent.”
On the surface, these two news items seem unrelated. But, to my mind, they’re intrinsically linked–and not in a good way.
Taken on its own, you might think that an (allegedly) crooked hedge fund getting busted is the signal of better days to come on Wall Street, with more responsible money managers and more robust oversight. But with financial companies making up such a massive portion of our economic growth–without banks, the S&P’s profits would actually be down this quarter–I am not at all optimistic that the SAC indictment will lead to anything like the reform we need. Sure, the widely publicized case might hammer the hedge fund industry, which has already been taking plenty of lumps lately for underperformance. But it’s not going to get at the core problem that led to SAC’s downfall:
Wall Street has been living through its own steroids era. And both the SAC case and the resurgence of Big Finance show that it’s not even close to being over.
A million years ago in the 1980s I managed a mutual fund that charged new investors something called a “front end load” fee. Just for the privilege of giving their money to my company, our customers had to pay an obscene 5.75 percent of their investment right off the bat. Thankfully, those kinds of fees are rare nowadays. But mutual funds are still fleecing their investors in a big way.
When I quit the mutual fund racket in 1990, the industry was booming. It had recently found a huge new source of revenue–retirement accounts. The old pension system was dying and everyone was hailing Wall Street’s brilliant new financial invention–the 401(k). Trust me, after four years inside that business, I can say in all confidence that people shouldn’t put a red cent into actively managed mutual funds, let alone their entire life savings. And yet 60 million Americans have now placed their nest eggs in 401(k)’s. That’s a scary thought.