Financial markets 2017: Make P/E ratios great again.

• Author: Neal, Robert S.

In a year of intense focus on walls, audio recordings and deleted emails, what is surprising is how little the financial markets have reacted. Compare the U.S. financial markets to the market for the Mexican peso, which has fluctuated based on bets of whether Trump would win. Since May, the peso depreciated by about 15 percent, rebounded 7 percent when the Hollywood Access tape of Trump was released, and jumped to a 20 percent decline following the election.

In contrast, the U.S. financial markets have not reacted much. Last year, we predicted the market would grow "below average," and we were unfortunately correct. The return of the S&P 500 from November 2015 to November 2016 is about 3 percent, most of which is after the election. This is certainly below the long-term average of about 8 percent, not to mention the high returns we had from 2012 to 2014 (the market grew 16 percent in 2012, 32 percent in 2013 and 14 percent in 2014--for a remarkable total of 75 percent).

Opinions are split on why the market has had a flat response to the political campaigns and a positive response after the election. (The 7 percent fall on election night was in the overnight futures market, which is not very liquid. Jim Cramer said it was "some guys trading in their pajamas.") Some argue that the market expected Hillary Clinton to win and to continue the current policies. Others argue that with Trump winning, he doesn't really mean what he says--except maybe on taxes. Still others argue that neither Clinton nor Trump would have been able to implement their agendas because the Congress would be split, and Republicans in Congress have a very different policy agenda than Trump.

Our view is a bit of an outlier: We think the market treated both campaigns as if they were sales pitches that neither candidate believed nor would implement. What really matters is cash flows and valuation--which is what we mean by "let's make P/E ratios great again."

Factset examined the recent "earnings calls" of 386 S&P 500 firms between September 15 and November 2, and 80 firms mentioned the word "election." So only 21 percent were concerned enough about the election to even mention the word. In 2012, it was 26 percent.

For certain, the agendas that appeal to the base supporters of each party if fully implemented would not be good for the stock market. The Democratic agenda of higher taxes and regulation to ostensibly help the middle class will discourage business investment and...