Welcome To Trumpville: The Market In 1929 And Now

Sentiment has been mixed on the prolonged and ongoing bull market, as well as the recent rally investors have been experiencing since November, with some commentary dubbing it the most hated rally in history. Taking umbrage with that distinction, Mark Yusko, founder and chief investment officer of Morgan Creek Capital, appeared on Wednesday's edition of Benzinga's PreMarket Prep morning show to quell that narrative and discuss how rampant trader optimism from Donald Trump's election win might portend a historical and catastrophic fall-out for the bull market.

#2000.2.0

"This is not the most hated rally, that's just crazy," Yusko said. "Mutual fund cash is at an all-time low, individual exposure to financial assets is at an all-time high, every sentiment indicator is nearly off the chart on bullishness, the number of bears is near the record lows. I'm just calling B-S."

Yusko was unequivocal about the hard number sentiment of the bull market, which has persisted for about seven years. However, Yusko was also clear that no rally is indefinite.

Related Link: How Would George Washington's Economic Policy Compare To Trump's?

Prior to the election, Yusko researched precedent bull markets and recognized some alarming similarities between the social and political circumstances surrounding the ensuing market downturns. He identified specific parallels between the current rally and the one which traders experienced in the late '90s.

He referred to the correlations as #2000.2.0, 2000 two-point-oh.

"I started [...] with this construct that I called #2000.2.0," Yusko said. "It really looked to me like we were setting up for a repeat of 2000, 2001, 2002 in '16, '17, '18. You had an election cycle, you had [...] a new President coming on to an eight-year president [...] you had a small shallow recession in '01, and you had this drawn-out bear market."

However, as business and consumer patterns continued to match Yusko's #2000.2.0 construct, events didn't follow his predictions. Instead of fostering a bear market, prices continued to rise.

"We had everything going that way, earnings started to fall — they fell about 20 percent peak-to-trough — but the market didn't fall. So there's something strange going on." Yusko said.

#WelcomeToHooverville

That brings things to today, where Yusko believes both Washington and Wall Street are imitating another historic antecedent to the current bull market rally: the election of Herbert Hoover and the 1929 market crash.

"I think if you look at the similarities between Donald Trump and Herbert Hoover, they're really kind of frightening," Yusko said. "He was only the third president elected without experience, never elected to political office before just like Hoover and William Howard Taft. We had a republican sweep for the fourth time in the last century, promises of all of these reforms just like in 1928, and the market believes all of Hoover's promises and rallied really sharply from his election to a peak on Labor Day of 1929."

Yusko christened the new schema "#WelcomeToHooverville." And, beyond the circumstantial connections between Presidents Trump and Hoover, he has observed similar optimism on the part of investors toward the market.

"If we go from what are just silly valuations today, overvaluations, to stupid valuations by Labor Day, then we could have a much bigger downside than a normal recessionary downside," Yusko said. "The problem that I see is that you've got this just relentless upward march of prices over the past seven years [...] Earnings are the same level they were in 2011 [...] yet the market is up almost 75 percent, and that's all because the multiple. The P/E ratio went from 15 to 26. Paying 26 dollars for a dollar of earnings usually has not worked out very well for investors."

For context, the P/E ratio of the market circa 2000 reached a peak of 44.2, which was a result of price matching rapid earnings growth throughout the late '90s, and a peak of 32.5 circa 1929.

Hope Is Not An Investment Strategy

Before leaving, Yusko outlined a more concrete example of how tenuous the current market rally might actually be. He indicated the persistent optimism of investors banking on the promise of President Trump implementing tax and regulatory reform, and how actionable those promises have been to date.

"Here we are, a month-and-a-half in, and we've got no legislation even being proposed," Yusko said. "We've got no plan, no plan at all for how we are going to get there [...] If those things don't happen, this Trump bump, Trump trade, whatever you want to call it, unravels very quickly. Because it's a hope trade, and hope is not an investment strategy."

Tune in at the 35:45 mark in the track below to hear Benzinga's full interview with Mark Yusko.

PreMarket Prep is a daily trading ideas show that focuses on technical analysis and actionable short term trades. You can listen to the show live every morning from 8–9 ET here, or catch the podcast here.