The Trump Accounts Sentiment Indicator

As you might have heard, the government recently announced that it is going to create investment accounts for all new children born in the United States, funding them with $1,000 to be invested in…

An S&P 500 index fund.

Where do we begin?

I don’t really want to talk about the merits or demerits of the Trump accounts in much detail, though I acknowledge that some people need a nudge or a shove when it comes to savings and investing. And yes, they are tax-deferred; and yes, you can put in another $5,000 per year; and yes, you can use them for college or housing or anything else when you turn 18. Kind of like a UGMA account.

So, let’s say that they are a good thing for the time being and examine the underlying assumption: Do we really want to put kids all-in on the stock market?

The Past Is Not Prologue

I can tell you that the worst-ever return for the S&P 500 over a 20-year period was about 6%. And if you have $1,000 in a Trump account for 18 years, and you put no additional money in, you will have a little more than $3,000 when you turn 18, assuming a 6% return. Of course, people are assuming a much higher return than 6%, which is not unreasonable given what the market has done for the last 17 years. Is it possible that the stock market will return less than 6% over the next 18 years? I’d say the probability of that is elevated, given where valuations are at the moment. When valuations are high, forward returns go down—everyone knows this.

But the point I want to make here is that everyone just sort of tacitly assumes that the best place to put your money for the long term is the stock market. Okay—what if it isn’t? What if something else does better over the next 20 years? What if it is bonds, or commodities, or some linear combination of the three? I make this point over and over again—the past is not prologue. And the people who say it is will be the first ones to point out that the one-, three-, and five-year returns on mutual fund prospectuses have no predictive value.

The stock market is a function of corporate earnings, which is a function of economic growth, which is a function of a lot of things—especially politics. Thinking ahead here, the prospects for the Republicans in 2026 are dimming (not that the Republicans are that free-market these days, anyway). What if, in 2028, AOC becomes president, the Democrats sweep Congress, they have a filibuster-proof majority in the Senate, and we end up with 90% income tax rates and 50% corporate tax rates? What does the stock market do then?

Am I the only person who thinks about this stuff? I can think of a lot of reasons why economic growth comes down, and I can think of a lot of reasons why corporate earnings come down, and they don’t all have to do with politics. We could have—gasp—a hurricane-force recession. That could happen. Maybe we have a recession that lasts 10 years. No, you say, that is unpossible. Could never happen. I wouldn’t be so sure.

A Bell Ringer for the Stock Market

My philosophy on all this stuff (if you know anything about the Awesome Portfolio) is to own a little bit of each asset class because you can never be sure what will happen in the future. 

I can envision a future when stocks go down. Might be hard for you, but I can envision it. I have little ability to time it, or profit from it, but it will probably happen. I don’t think we’ve eliminated the business cycle. You might think that if you have 500 stocks, you are diversified. That’s what the index fund beards thought when they invented the index fund. I assure you that you are not diversified. You are only diversified when you own a little bit of every asset in the world—real estate in Korea, bonds in Scotland, stocks in South Africa, gold, and every currency in the world. Of course, that is impractical, so we have a few shortcuts.

Anyway, from a sentiment standpoint, the Trump accounts are a bell ringer for the stock market. You know when the lows in interest rates were? When the Treasury decided to issue floating-rate notes—at the ding-dong lows in yields. Out of all dumb actors in the financial markets, the government is the biggest and dumbest. The government has just put the seal of approval on the S&P 500. You should run the other way as fast as you can, screaming.

Jared Dillian, MFA