Very few people thought Donald Trump would be elected president and even fewer thought this would be great news for the stock market. You can firmly count me in the camp of thinking MR Trump had a much better chance than the dying mainstream media would credit him. Any of you who have talked to me about this, know that my general feeling going into this election was that the polls were skewed 7 ways to Sunday as was the economic data. I have a series of articles on how various measures of economic data are skewed to benefit the incumbent.
The fact populist candidates such as Bernie Sanders and Donald Trump were able to rise to such prominence is anecdotal proof that voters were not seeing the “recovery” that the Obama administration has been trying to hype.
Even though I was right on Trump, I was not right in the direction of the stock market…. In the near term. To quote Benjamin Graham and the title of a recent LPL article “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
“The election is finally over and to the surprise of many, equity prices rallied after the Trump victory. It was widely believed a Trump victory would bring with it increased uncertainty and a likely equity selloff. That wasn’t the case, as the S&P 500 gained a surprising 1.1% on the day after the election. The big question now is: could this early strength tell us anything about future returns?”
The commodity and bond markets did not have such luck as commodities finished the week down, while Bonds had one of their biggest declines ever and lost more than $1TN in value for the week.
The decline was mainly due to interest rate risk. When rates go up the underlying value of the bonds, go down. The good news is that for investors who were holding short-term bonds… the remaining principle should theoretically rollover into higher paying bonds as interest payments are reinvested.
Some reasons I suspect the market rates are going up is due to less demand from foreign buyers. If you run around calling China currency manipulators, while not acknowledging the role the FED has played in our own currency manipulations, you are effectively telling your largest creditor to get lost. The largest creditor is actually not China… it is the Federal Reserve system, who Donald Trump has also gone after. I tend to agree with his stance on auditing the FED, but in many regards, he is trying to have his cake and eat it too.
You can’t say you are a low-interest rate guy in one breath and in the other send out tweets calling to Audit the FED. In my opinion, auditing the FED would have the same political effect of auditing Anthony Weiner’s laptop. No you wouldn’t find any lewd pictures, but I believe you would more than likely find years of: fraud, waste, abuse and corruption. Just like auditing Anthony Weiners’s laptop would more than likely doom any future political aspirations for Mr Weinger. In my opinion, if Trump were actually to pursue this strategy of auditing the FED it would politically kill the FED.
When you bash your two largest creditor’s, the propensity for them to lend to you will be greatly diminished.
Another thing that could be going on is that people think that since the Republican’s were able to pull of a clean sweep, that Trump will be able to get a lot of his agenda through. Some people are even making Reagan growth parallels. The problem with that is that the environment was completely different. Reagan more than doubled the debt and significantly raised the debt to GDP ratio. Mr. Trump does not have that luxury, now that debt to GDP ratio is 105% according to the FRED website.
If people realize that the same circumstances that benefited Reagan do not exist today then you might to see more money go back into safe havens at which point this past weeks moves would presumably reverse themselves in the short run.
In the long run my general feeling is that President-Elect Trump will enact very pro growth legislation and repeal a lot of burdensome regulation. No matter who is President we have a tough road ahead of us.
The main thing I am keeping my eye on is the FED. Since the FED is supposedly data dependent and since the data has been “good” what could the FED possibly be waiting for when they meet in December.
Below is a chart from January 2012. Back in January the FED thought rates would’ve risen 16 times by now. I had contested the Fed would not be raising rates at all.
After the FED regrettably raised rates once last December, I also predicted they would wait as long as possible to raise rates again and would only do so 1 time.
Going back to this article I wrote in June.
“The last thing to keep in mind is Donald Trump has openly said he would replace Janet Yellen. If you knew your job was on the line and rising rates might upset the current apple cart, would you be inclined to not raise rates?
And there is your answer. The Fed will more than likely raise rates once to maintain some semblance of credibility but after the election the FED might be able to give a more honest assessment of the economic conditions. The one saving grace the FED has is other central banks are negative which helps drive demand in our bond market. Absent foreign demand we might have seen the market raise rates and eventually the market and not the FED will determine when rates will rise.
From today’s dot plots I tend to agree with the one member who came in way below consensus. As for the other members I hope their budget allows for a calculator.”
I think people are discounting the FED rate hike.
If the FED does raise rates and if the perceived feeling is that there will be more to come than this will be bad for equities.
This could then reverse what we’ve just seen happen and for right now we need to stay put.
We will be keeping a close eye on the FED as well as the chances of Trump’s tax plan passing which I have summarized here.
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Tim Picciott CFP® CRPC®