President Trump says his tax cuts will stimulate the U.S. economy. Thomas George, Portfolio Manager, TD Asset Management, talks to Kim Parlee about how the markets could react to the plan, what could drive stock prices higher and the role of gold as insurance.
Joining me today is Thomas George, Portfolio Manager of the TD Precious Metals Fund and the TD Resource Fund. And it is great to have you back.
Well, thank you.
Let's start with-- the health care bill, I think, was important because it kind of showed his ability to get things done. That would be the interpretation.
The great negotiator.
Yes. Yeah. But today-- I would say-- the tax plan wasn't announced. His tax plan intentions were announced. No reaction.
Everything with him is like this bluster of tweet storm. And it's going to be the biggest, the best. And ultimately, effectively it was the number that was widely expected. At least for the market, this 15% corporate tax.
And effectively, that's the number that came out.
And repatriation of money, but we don't know at what rate.
Exactly. It's skinny on details. It's like an extended version of his Twitter, a little bit.
And also, I think the market is kind of fixated on the health care piece, where it's like, that's nice. But could you even get it done?
Yeah. That's the critical part here. Can you get it done? And ultimately, this is where things are starting to fall apart for Trump.
Let's take a look, though. The market has been up this week. That's one thing. And we saw part of that being driven by what's happening in Europe. We actually have a centrist candidate who made it through the first round.
Is that enough to kind of have people feel a little more confident about things?
I think that was an outstanding worry. At least for now, it's off the table. We still have another vote. But it's at least taken that near-term very bearish sentiment off the table. And I think people are going to come back to the view of, can Trump get things done? Because if you look at where the markets have started to correct, that really all started around when health care started to fail. And fail terribly it did.
Yeah. And I think people also-- I mean, I had seen some people say, look at the levels where it was before the election, and that might be where-- I'm just saying in a worst case scenario it could go there.
Yeah. From our own perspective, there's been a divergence, a very clear divergence, since the election between soft data and hard data. Soft data being sentiment. So the market forces have really driven the market up, just purely based on sentiment, whilst the hard data, the economic data, just hasn't followed through. And that's been the challenge. If he can't actually come up with legislation to make that happen, it's going to be tough.
What's the biggest challenge to the markets right now?
Right now, from my perspective, it's valuation, without a doubt.
I think we've got a chart here. Let's bring it up. And this is just a look at the S&P 500 with the P/E ratio. What are we looking at here? And why is this notable?
Yeah. So this is the Shiller P/E. This is a really good grounding chart. So the red line is the Shiller P/E. So what that P/E is, it's a price-to-earnings ratio, but looking over the last 10 years of the average earnings and inflation adjusted. So this really tries to take away the whole animal spirits of the market of looking at a P/E in the here and now.
And if you notice that we're at an elevated level, the one standard deviation higher relative to history now
We're not at 2000 levels.
No. Well, no, we're not at 2000. So this is just an indicator. It's not the be-all and end-all. But it's a point. We're actually at a 90th percentile if you look over the last 100 years.
And so if you were to look at this, we're at a 90th percentile. If you're to look at a here and now price-to-earnings ratio, we're at 18 and 1/2 times. That's also somewhere around the 90th percentile. So in a few different measures, you're seeing valuation at the top end of the range. The very top end. But that's not to say that the party stops. We just need Trump to follow through.
If you look at the last five years, the S&P 500 is up somewhere in the range of 78%. Earnings-- not the adjusted earnings, but gap earnings are up 8.
Let that sink in for a second.
Yeah. It really comes back to that chart. So that's all P/E expansion. That's all what it is.
So with P/E expansion, you kind of need that bottom part of that equation--
Yeah, catch up.
--Start to catch up.
You brought a chart here about leverage as well for S&P 500. So what are you noting here? I mean, is this a positive or negative for the markets?
Another part of the wall of worry.
Mr. Happy, I'm sure. Yes.
I'm not saying that this is the end. I think the best way to categorize this is perhaps we're in the seventh inning, seventh inning stretch. But that can quickly accelerate to ninth, or we can have a really, nice, long, drawn-out, continued economic expansion. So this is net leverage. So net debt to EBITDA of the entire S&P 500. And so what we're looking at is different views, either median, mean. Take out energy.
But bottom line is that we're at elevated levels. We're north of 1.5 times. And if you kind of look at that, just on the median level, that's basically been the topped out level. So if I could play bull/bear with myself here, that's a bearish view. Put on an interest coverage perspective, because of the low-rate environment, it's not as dire. But that all comes back to the view, well, what happens in a normalized interest rate environment?
You don't have to really go too far to say that could be problematic, right? So And that brings it all back to Yellen. And the real conundrum she's facing is that you start to step this thing back to something resembling normalized. You've got this chart that just shows you we've got a very leveraged S&P 500 relative to history. It's tough.
Yeah. And a leverage to the world, too. It's not just S&P 500 companies.
It's personal, corporate, government.
Then that's critical, yeah.
Yeah. Let me ask you-- I've only got about 30 seconds here, though. But obviously, you manage the Precious Metals Fund and Resources-- gold. Gold is on a bit of a tear lately in the past little bit. So what do you see there?
So what I would say here is the economic insurance policy is back on.
So all that I'm trying to say here, very simply, all these charts put together, is there are times when indicators are flashing. And those are the times you just take out insurance. You don't take your money out of the market, but you put a little money in gold as an insurance policy. And gold's worked as a phenomenal insurance policy against downdrafts in the S&P 500. Any of the last corrections, it's worked out 9 out of the last 10 times it's outperformed. And it's been a positive performance the last 10 times the S&P 500 has been down.
Great. So people are buying into that insurance right now--
The signs tell you now's the time to look at it.
Tom, it's always great to have you here.
Thomas George. He's Portfolio Manager of the TD Precious Metals Fund and the TD Resource Fund.