April 10, 2017

We’re not supposed to discuss politics at parties. Well, we may want to exclude politics from our investments too.

The fact is, markets have performed much better under Democratic presidents than Republican ones. That seems to defy conventional thinking because Republicans are often thought of as pro-business, while Democrats are seen as proponents of labor and taxes.

Perhaps the exception to the rule, the market returns under President Trump’s administration have been rock solid so far. But what you see isn’t always what you get.

The charts, the momentum, the flows – it’s all very positive. But beneath the surface, things are murkier. For instance, New York Stock Exchange stocks trading above their 200-day moving average are at their highest levels in four years. That’s a strong signal of overextension.

The sentiment has been wildly bullish for quite some time, as have the market returns. Both are now hitting extreme levels, while the technicals behind the returns don’t induce as much confidence.

Fueling the sentiment is talk of tax cuts, deregulation, and infrastructure projects. And believe me, they’re all moving the market. But the fundamentals don’t tell the same story. They point to gradual growth at best.

This seems to be a broken record. Talk drives returns, while the financials make you wonder. But, the market is up, so nobody is complaining. Still, the gap between sentiment and hard financial metrics should be concerning for investors.