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Trump Drives Markets Higher – Will It Last?

Markets are trading news and technicals

The first 100 maze.

That is what it should be called and that is how it is going to feel. The markets will be reeling from headline to headline on what might be the last thing out of some diplomats’ mouth. It may sound crazy but that is almost returning the trade to how it used to be – trading on news, trading on the technicals, and trading on speculation.

So, what can we expect from President-elect Donald Trump?

I certainly am not a historian but it is interesting to note that there are a lot of programs and edicts that will directly impact the financial markets. So here is what I am watching.

Inflation

Every major economy around the globe has been struggling with inflation or the lack thereof. When things go wrong and your economy begins to suffer, your currency takes a hit. Good for exports, bad for imports. To some degree, it is a synthetic interest rate cut. Cheaper interest rates generally lead to a cheaper currency.

In 2008 when we embarked upon our plan to inflate our way out of the doldrums, we found ourselves: We cut rates to zero and tried to cheapen our currency. The only problem is that we weren’t alone in that global market of doldrums. Inflating your way out of problems usually works. In this case, the world was and is going through a bad time and with everyone else cutting rates to zero or in some cases less, the actions have no teeth. The net change is really no change. In order to inflate your way out of a problem, you need to import inflation from a stronger economy and export deflation back. When there are no other strong economies, the inflation remedy is dead. That is exactly what has happened here in the U.S. Asia helped us out eight years ago, but that has increasingly become a difficult ask. There are no hot economies to steal inflation from. We need to find a new planet with an overheating economy on it, export our deflation there, and import their inflation. Good luck.

Trump has stated that he wants to see 4% growth. If that is the case, we are going to see inflation. The problem is he inherits an economy that has seen a very lackluster CPI and PPI (two inflation measures) and GDP around 2%. What can a president do in the first 100 days to stoke inflation? I think he will have a difficult time as the dollar is very strong and we have the Fed dead set on raising interest rates again this month. Small side note here (and a bit of skepticism): When the Fed raised rates last year at this time, they told us to expect four rate rises this year. Ha. Their inflation mandate has really not justified a hike but we sit here on the cusp of a second rate move higher – just because. I’m in two minds about it. First, having been a trader for 28 years, I only remember central banks around the world raising rates to cool off an overheating economy or at worst, get out in front of an economy that looks like it is about to overheat. Doesn't pass the test on this economy. So here we are, raising rates, strengthening the dollar, and rallying the stock market on Trumponomics – even before it has been rolled out.  

The strong dollar and interest rate hikes will not help inflation.

At press time, they are trading a 10-year yield of 2.41% – a 60+ basis point increase in recent weeks. That is a huge move. Obviously, the expectation of inflation is being traded here, but it seems to me to be a little ahead of itself. As far as developing countries are concerned, the U.S. bond market is starting to look very appetizing. We are trading on faith right now. The definition of faith is believing without seeing. When it comes to inflation, I am more in the camp with Missouri’s state slogan, “Show me.”

The screaming stocks

And then there is the equity market. I have written at length about the Trump Rally, and because of the ferocity of the move, starting with election night, it just feels like to me that there too is a little faith trade in the market, but I blame it more on the fact that a lot of money went to the sidelines; when the train started to leave, they jumped on board albeit a little, no wait – a lot late. This new wave of buying, at all-time highs, setting all-time highs, will need the new president to embark upon policies to support its levels. Just in the month of November, the Dow is up 5.4%, the S&P up 3.4%, the Nasdaq 2.6%, and...wait for it.....the Russell 2000 is up nearly 11%. Yep, 11%. On what you ask? Faith, hope, and the IDEA that Trump will make a difference. Seems kind of dangerous, if you ask me. That is what makes market timing pretty difficult. If you leave, it is very hard to get back in because invariably you are buying back into the market at a higher level than your exit. Ouch.

Jobs

Unemployment falling from 10% to 5% all the while the economy was stagnant to shrinking. I hear an alarm bell. Rapid rise in the number of people working two and three jobs. I find it hard to explain a lackluster GDP while we are at or approaching “full” employment.

The cracks are everywhere. Donald Trump has a very difficult task ahead. He has the market worried about inflation and his infrastructure spending. A lot of people are back to some sort of work, but our growth is slow, and they really aren’t making anything. I think the election tells us that the American worker wants a good job, not a $15-an-hour job. Keeping Carrier is a good start. Obviously, he will have to do more.

One thing that is certain is that the markets feel different. The Trump rally in equities and the bond sell-off are both good examples. But when you go over to Europe with the shakeout of Brexit, and cracks starting to show in Italy and France, things are beginning to get interesting again. It is different this time because we are trading, really trading. The markets got so complacent with QE and zero rates it all became a bit too manufactured – like our growth. Now things feel as though they came unlocked.

So the path to success will be winding, like a maze. It’s a difficult path to prosperity, but the markets are trying to tell us we have a puncher’s chance of scoring. It won’t be easy, but those first 100 days are critical to the market’s psyche and the nation’s faith.

 

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