So trading the first year of the Trump presidency tends to boil down to this: Do you think Trump can perform the miracle he's promising...? If so, then invest away! If not, then you might have another year or two left before the chickens that were hatched by the Fed in 2008 start coming home to roost.
We've talked in these pages numerous times about the New Normal of the post-Lehman markets. That is, markets that are led not by economic indicators or market fundamentals but by central banks. The Dow and the S&P have been on an eight-year bender funded by Fed funny money and we've seen the exact inversion of economic reality take hold as investors adjust to the ever-higher highs.
Bad news is good news, according to this inverted logic, because it means that the central bank is more likely to intervene.
Well for the first time in a while, we have a completely different force driving the markets this week, and it might be a sign of things to come. No, it's not economic indicators or market fundamentals that are fueling speculation this week; it's just plain politics.
As US markets return from the long weekend investors are grappling with two separate (but related) political phenomena: Brexit and the Trump election. Yes, the two signal political events of 2016 are casting a large shadow over trading in 2017, and neither one bodes well for the markets this week.
First up was UK Prime Minister Theresa May's recent speech about how Britain will start to extricate itself from the European Union. Her insistence that she wants a clean break with the EU, not “anything that leaves us half-in, half-out” is music to the ears of the voters who cast their ballot for Brexit, no doubt, but not so reassuring to investors. It means that Britain will likely lose access to the common market and their will be economic turmoil, causing market participants to withdraw from stocks and risky investments.
Meanwhile on the other side of the pond Trump's pending inauguration towers over the entire global economy. There is much uncertainty about how much of candidate Trump's rhetoric President Trump is going to enact, and once again it's the uncertainty that is causing investors to hold back, with both the Dow and S&P taking slight losses last week going into the long weekend.
Of course, the real question is not how market jitters will send stocks up or down in the short term; it's how markets will react in the long term.
Sadly, it's impossible to predict policy, so no such determination is possible. But we do know there is a modest amount of wind in the global economy's sails right now. For once, major institutions are revising their global GDP growth expectations for the new year upward rather than downward, including the World Bank, which is expecting 2.7% growth this year after a sluggish 2.3% last year, and the IMF, which is also expecting a pick up in global economic activity in 2017-2018. They are both pointing to emerging market activity as a positive indicator and indeed emerging market ETFs are already bouncing back above trend lines after taking a Trump election battering.
The big asterisk in the World Bank report, though, and everywhere else is:
*All of this depends on whether or not the world is ending.
Trade wars with China. Hot wars with Russia. Repealing and replacing Obamacare. Tariffs and job plans and a thousand other government programs that remain to be seen could of course change the global economic outlook in an instant.
So trading the first year of the Trump presidency tends to boil down to this: Do you think Trump can perform the miracle he's promising, turn the American economy around, somehow dig the federal government out of its $19 trillion hole, safely de-leverage the banks that have gotten use to their heroin fix from the Fed, maintain good global relations and trading partnerships, and handle any crises that might arise on the way? If so, then invest away! If not, then you might have another year or two left before the chickens that were hatched by the Fed in 2008 start coming home to roost.
Either way, we're in for four of the most eventful years of our political lives.