Maybe the US president does affect markets after all

Many thought when Donald Trump became US president markets would react badly. How wrong was that?

Tax cuts and de-regulation have provided a boost to markets. However trade policy has also provided uncertainty. Rising interest rates, often not good for equities, have been seemingly offset, so far, by low unemployment and inflation and rising corporate profits.

With the most recent events in Washington, including Trump’s out-of-left-field tweet announcing an immediate troop withdrawal in Syria, followed by resignations by Defence Secretary Mattis and US anti-ISIS Envoy McGurk, Trump asking if he can fire Fed Chairman Powell, Trump associates being indicted and convicted by Mueller and other prosecutors, the Trump foundation closure due to inappropriate use of funds, the government shutdown that Trump said he would be proud of, Treasury Secretary Mnuchin’s calls today to top banks to check on their liquidity (was that even a problem?), to name a few, may mark a tipping point where the unpredictable deeds of Trump and his administration start to affect consumer and business confidence as well as market sentiment.

Investors have to be scratching their heads and wondering where all this is going and how much damage the seeming chaos might bring. 2019 doesn’t look like it will get much better with unresolved trade issues with China and others, the ongoing Mueller investigation and with the Democrats taking a majority role in the House of Representatives, where they will have the power of subpoena to conduct ever more investigations into Trump et. al. No one knows what tweet will next emanate from Trump’s fingers.

Powell is signalling a slowing of interest rate increases for next year. That might help markets settle. But forecasted profit growth is also slowing for 2019, same for global growth. Trump’s erratic behaviour seems to be amplifying uncertainty.

I can’t help thinking 2019 will be more volatile than 2018 as the drama, or do I say crisis, south of the border plays out.

We certainly live in interesting times.

Update: The Washington Post has a piece about how investor expectations may be adjusting to the reality of a Trump presidency.

 

Author: Michael

staff@money4retirement.ca

2 thoughts on “Maybe the US president does affect markets after all”

  1. Michael,

    You have brought up allot issues for 2019. I agree it will likely be a bumpy ride, but there are many reasons why 2019 could be a really good year. Heck, 2018 on the US side ended down by only 6% which after dividends is about -4%. Sure the ride was bumpy, but -4% is in no way devastating as most analyst would make you think.

    If you believe the US president has an effect on the markets, then you should believe in the presidential cycle where the third year is always positive and strong. If it sounds hoki, look up the stats yourself. The theory says that the third year is usually the point where the president has exhausted his political capital and can no longer pass substantial legislation (read wall). Legislation becomes logged jam in congress and markets rejoice as uncertainty falls. Just as the theory suggests, the democrats took the lower house and split the houses. Less power to the president the better. The president will likely still cause havoc in other ways, but its certainly been diminished.

    As for 2019, who knows for sure. I like to work with probabilities as you know. Besides the presidential cycle, the conference boards LEI (leading economic indicator) which has been a very dependable indicator in forecasting recessions is very positive. Also the yield curve although flat is also positive. Job numbers were recently strong along with low inflation and other positive economic numbers. There are indicators suggesting slower growth, but that is normal, they get revised all the time, the economy goes up, then down, meanders etc…never linear.

    We could be falling into a bear market, without a recession, but statistically unlikely. It is more likely that this is a sentiment driven correction. Even if a recession-less bear was the case, it would be short, shallow and the market would rocket back up quickly. Could a big bear complete with a recession be hiding just around the corner? Its possible but nothing definitive suggest such a case at this time. There is not enough evidence to bet on it, ie go cash….

    The real question for every investor is: what do i do now? Getting out of the market statistically lowers your returns, unless your lucky or are certain of a downward market move. Lacking any ability to time markets or rely on luck, guts or tea leaves, investors are best to stick with the probabilities and hold. If you are more the buffet type, then there are bargains to be had. He seems to have done well using this approach as i recall.

    Are you considering going to 100% cash like assets? Your asset allocation model may actually have outperformed my 100 percent equity in 2018. I returned almost exactly zero%, ended where i started. 2019 will be interesting for sure.

    Raven

    1. Hi Raven,

      Good to hear from you.

      Of course you could well be right that 2019 will be a good year for markets. Fundamentals do remain sound as you point out.

      And yes, stateside markets were not a disaster – as commonly suggested in the press.

      I hope you are right about presidential cycles. It seems to me though, and I hesitate to say it, but maybe this time is different. There are signs of spent political capital but there are increasing signs of instability – now a threat of declaring a state of emergency over the stupid wall!

      That doesn’t sound remotely stable to me and markets don’t like uncertainty.

      What to do now? I am largely staying the course. No big moves planned at all. I watch with interest as the holdings I own behave in the down market – and trying to dispassionately learn.

      I have no plans to exit equities and go to cash. I think that would be a mistake as I am unable to do the market timing and I don’t feel particularly lucky!

      I am watching for bargains and I would say there are more now than a few months ago. Once I do my re-balancing math in the next couple of weeks or so, I’ll post my 2018 year-end review and some forward thoughts.

      I think we’re up around 1% in 2018. Am on vacation right now so haven’t crunched the final numbers quite yet. I am happy to say I am sleeping pretty well at night though.

      In some ways I’m looking forward to 2019. There could well be some interesting surprises. All the best with your investing!

      Cheers,
      MP

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