Wow! It’s a “game changer” by Harold AGJ Davis, Winnipeg

   Calling something a “game changer” has become commonplace, even trite. However, what should we call a policy shift so profound that it could change the underlying assumptions of equity valuation models?

  Without tracing America’s position in the world back to the creation and sponsorship of international institutions such as the IMF and World Bank seventy years ago, simply consider the expectations of corporate management since the collapse of the Berlin Wall.                                                                                                                                                                                                          The last three decades have been characterized by global free trade and the progressive harmonization of rules and regulations worldwide. The business model of the typical S+P 500 company has been that of a multi-national corporation headquartered in the United States.

  American enterprise thrived abroad. Backed by diplomatic leadership and the largest military in the world, American political and strategic influence ensured the foreign acceptance and security of foreign subsidiaries and branch plants. The advantages and mechanics of the system were known and understood while investment analysts learned to take the reliability of earnings streams for granted.

However, “America first” attitudes threaten to tilt the playing field, and foreign capitals have been quick to suggest that new lines could be drawn.

  The implication for the US stock market is simple: the future contribution of offshore earnings to consolidated results could become more volatile. Of course, this new unpredictability or greater variability of returns would suggest a more conservative valuation for common stocks to compensate investors for the increased risks. In brief, the investment paradigm familiar to a generation of analysts and portfolio managers may be coming to an end.

  Chartists among our readers are asked to consult a monthly chart of the S+P 500 displaying a MACD (Moving Average Convergence-Divergence) using standard intervals. Of particular interest, the MACD’s behaviour since 2009 is strongly suggestive that the entire advance up and out of the meltdown lows is well into its fifth “leg”. Non-chartists should understand that a renown technical analyst, R.N. Elliott, theorized that major market moves progress in five waves or “legs” consisting of three advances punctuated by two downward corrections.

  In summary, emerging White House strategies might be game changers that cause the stock market to form an important top in the months ahead.