Why the Stock Market Is Stacked Against Donald Trump

For a few golden weeks in November, U.S. stock markets loved Donald Trump.watch the video here stock As this magazine went to press in late November, equities were in the middle of a record-setting rally that charged Wall Street pundits and strategists with a fresh sense of optimism. Market watchers at Goldman Sachs  GS 3.64% , JPMorgan Chase  JPM 1.58% , and Raymond James  RJF 1.18%  cited Trump’s pledge to roll back burdensome regulations and lower corporate tax rates as decidedly bullish for U.S. stocks.

But for investors who study the forces that govern stock prices long term, the outlook was no more upbeat after the election than it was before—and it was far from terrific. Put simply, equities are really, really expensive, and only became more so after Trump’s surprise victory. “The best predictor of future returns is whether you buy at low or high prices relative to earnings,” says Chris Brightman, chief investment officer of Research Affiliates, a firm that oversees strategies for $161 billion in mutual funds and ETFs. “Today individual investors and fund managers who expect the near-double-digit returns we’ve seen over history will be sorely disappointed.”

James Montier, a value investor at asset-management firm GMO, provided this dim appraisal of U.S. stocks: “This is a hideously expensive market, and I don’t need to own it.Take a deeper dive into the thinking of pessimists like these, and it’s hard not to reach similar conclusions. (More on that in a moment.) Fortunately, investors can garner much bigger rewards by looking beyond the super-rich American market and beyond stocks in general. This is the time to take a broad, venturesome view encompassing all the best—meaning mainly the cheapest—places to put your money.As we’ll see, spreading your portfolio across a broad range of underpriced assets can add crucial percentage points to your returns. Best of all: If you do it thoughtfully, you can improve your odds while shouldering little or no extra risk.