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Is ‘bubble mentality’ making stock market investors complacent?

Is ‘bubble mentality’ making stock market investors complacent?

Global stock markets hit a record high after Donald Trump became President of the United States. To say that these two events have;

a) Actually happened
b) Surprised so many, is a huge understatement.

And here’s another surprise; although the stock market surge did eventually level off – as expected – it re-emerged again recently, still strong, to become known as the ‘Trump rally’. This phenomenon included stock indices rising by about 10% since Mr Trump was elected, the Dow Jones breaking 20,000 and almost $2 trillion being added to the S&P 500.

Whilst investors have been delighted they have had something to cheer about at last, their joy could be short-lived, with experts pointing to some of the president’s pre-election promises – especially in the area of international trade – could fall spectacularly flat.

There is also the risk that Mr. Trump won’t be able to deliver on his tax-cutting plans – or that these plans won’t produce the extra growth that markets expect; and what if the Federal Reserve don’t play ball either, by raising interest rates fast enough to offset any large growth gains produced by the Trump effect? Hmm.

If we add to the melée President Trump’s threats to levy harsh tariffs on China and Mexico whilst ripping up trade-deals along the way, there could be a trade war (or two) a-brewing.

Strangely, Wall St. is acting as though it is having such a good time at this party, it is oblivious to these very real threats to investors’ wealth, and, according to S&P senior industry analyst, Howard Silverblatt, “There definitely is danger”.

Investors appear to be looking at Donald Trump as though he is a conventional president, yet he isn’t giving off signals that say he has any intention of fulfilling that premise. His love of Twitter and his dismissal of journalists spreading ‘fake news’ is not only common knowledge, but it has aroused uncertainty and nervous curiosity in the newest White House resident.

The big fear is that investors in traditional stocks, shares and commodities markets are suffering from ‘bubble mentality’; they are now taking risks they were averse to a few years ago and displaying a troubling recklessness that can only be attributed to eight long years without higher market returns.

This optimistic, and, some would say, rash behavior could backfire spectacularly when – not if – these very same investors are exposed to the downside of this exuberant period. The downside could come from anywhere; in the form of a delay in the promised tax reform, a political shock or even signs that protectionism is adversely affecting growth.

At this moment in time, investors are simply not ready to listen to the warnings from prediction markets; yet, financial experts and analysts agree, now is a really good time for investors – whether private or public, large or small – to diversify their portfolios.

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