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255018

Outside Market Factors Build, Shellady Says

President Trump’s moves move market sentiment.

The temperature of the water seems to have changed a bit from past weeks.

President Donald Trump’s frenetic pace is running into some partisan roadblocks. It will be interesting to see how he manages this new minefield. As one of his aides said during the campaign, Donald Trump’s temperament is better than most. The actual quote was, “Has anyone here ever tried to build a skyscraper in New York?” You have to deal with the unions, the city, and protesters.

A Closer Look

Firstly, oil and the dollar. I think this will be a decent story all year. The OPEC production cuts look to be taking hold. We had reports recently pointing in that direction. On the flip side, we are also seeing a jump in U.S. shale oil – in essence, counterbalancing the OPEC cuts. This then turns my head toward the dollar where this week, the new administration alluded to false strength of the Euro. The dollar swooned, and you would have expected the commodity sector to get a boost. Some things did, but oil didn't. I have said before that for a large part of 2016, oil and equities traded in sync. We have had a few decent reasons for oil to rally, and we can’t break out of this $50 to $55 range. If we can’t rally on OPEC cuts and a weaker dollar, this oil market could be vulnerable to the downside. And, if that is the case, equities could be vulnerable, too.

When Rubber Hits the Road?

The last quarter’s read on GDP was still anemic. Up until now, the market has been giving the new administration a pass – but at some point in time, the proof has got to be in the pudding. As much as I am liking a new breath of fresh air, there are some startling facts that tell me just how hard the road ahead is going to be for this economy and Donald Trump. Barack Obama was the first president in 86 years not to have had at least one quarter of growth of 3% or more. We've grown at a sluggish sub-2% pace for a long time. Now we all know that the crisis of 2008-2009 was pretty dramatic and the worst crisis we have had since 1929. I will give the outgoing president those facts. However, Obama has another startling statistic that gets overlooked – he outspent, every single president before him – COMBINED. Yep, you got that right. He outspent the sum total of 43 presidents together and still could not muster up a single quarter of 3% growth. Ouch.

The market has so far given Trump the benefit of the doubt. The investment community is awaiting his cabinet confirmations and watching him check things off of his list to a dizzying degree. But things have definitely started to slow down. Now, I know that he has not even been in office for three weeks, but we are waking up from the inauguration hangover, and the market is telling me a few things. One of which is that a Trump recovery is not going to be that easy. As we start to get bogged down in some partisan politics, we have seen some money migrate to the safe-haven trade, which is gold. Gold may be a decent short-term benefactor here of the Trump uncertainty and a weakening dollar. The street was dead set on the dollar strengthening for the Trump administration, but so far that has been counterintuitive. This will be interesting all year.

Markets Act Confused

I was lucky enough to be on Stuart Varney’s show on Fox Business when we finally breached the media made-up marker of success and the 20,000-point line in the sand with the Dow Jones. It literally took us five weeks to finally get through that level... five weeks – and 100 points. By the time it finally happened, it seemed like the euphoric mood was lost. I think that can be said for a few of the big things we trade. Look at the 10-year yield the last five weeks and the oil market as well. Seems like we have been around 2.50% in the 10-year yield (really between 2.37% and 2.51%) for a while. Oil is also bracketed between $50 and $55. Mark my words, when one breaks out, they all will.

Green Hope

The three pillars of populism are cut taxes, cut regulation, and have a $1 trillion infrastructure spending bill. Like I said, the market is giving the new president a little wiggle room here, but I am afraid that the market is becoming a little impatient. This week we had the equity market sell off on whispers that the tax cuts won’t come until early 2018. This would not be viewed favorably by the investing community. Trump did address regulation this week with small business leaders, but the equity market wants to see and hear about tax cuts – sooner rather than later. If the president delivers on the three tenets, the market will like it, but his biggest job is going to be managing these tasks against market expectations and timing. This will be his toughest test.

Don’t Exit Brexit

We have a volatile year ahead of us with the Trump presidency and its nominations and implementations. We will also be hearing a lot about Brexit and its ramifications on the markets. Add to the mix that Holland, Germany, and France have elections this year – all of which are sure to turn into referendums on staying in or out of Europe – and we have a powder keg of events to navigate through. As I write, the populist candidate in France has just taken the lead in the polls. Could France be the next Trump/Brexit event? Our own stock fear index here in the states doesn’t really think so (we are not too far away from five-year lows), but I am not so sure. After all, as the saying goes, expect it when you least expect it.

Buckle up.

 

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