The nomination of Donald Trump triggered a major see-saw reaction in the stock market.
The S&P 500 immediately capsized 4% before recovering and surging 3%.
A similar swing in the market was triggered by Brexit for the same exact reasons… nobody was positioned for it.
That means the current surge in the market (up nearly 5% since the election) is an overreaction that will reverse.
You see, the market was positioned for gridlock before Trump’s nomination. Congress was expected to be split between a Democratic Senate and a Republican House of Representatives.
That meant regardless of who won, the White House would face constant battles with no real progress to get done.
But that’s not how it played out. Instead, the Republicans swept all three branches. And can now enact any policy it chooses (if it so chooses.)
This was the scenario nobody expected.
However, those that receive my Moneyball Trader newsletter (see below for more information) knew the market would play out this way. Here’s what I said before the election:
“I look at the election as a Brexit sequel. The market will overreact and then a few weeks later will settle down to digest the core realities.”
And now that the election is over, we need to analyze how the market is – and will – play out.
The initial 5% surge has been a vote for “Trump-o-nomics.”
For example, infrastructure construction companies like AECOM (NYSE: ACM) have been raging higher. It is up ~40% since Trump became president-elect. Same with Caterpillar (CAT) and others in the construction ecosystem. Trump is a builder and he understands that building out and upgrading our infrastructure is good for U.S. productivity. And that means jobs too.
This is just one example of the shift away from positions that favor monetary policy and towards positions that favor fiscal policy.
Put simply, keeping down interest rates hasn’t done much but enrich the “1%” and make the cost of living harder for the rest of the country. Thanks to easy credit, hot money is bidding up real estate to the point that housing takes up 31% of incomes today versus 20% a few years ago (source: BEA). In major metro areas, it’s above 50%.
Monetary policy has been code for making loans super cheap for wealthy people to buy up stuff. Fiscal policy is code for actual action, in this case the government spending money on goods and services. The source will be debt, but debt that is used to build bridges and roads is way more productive than buying bank debt and share buybacks.
It’s an important and meaningful shift in thinking. Obama surrounded himself with bankers and career politicians. Conversely, Trump is surrounding himself with business people. The difference is that where Obama and team understood industry in theoretical terms, Trump and his team understand it in real-world ways. It’s the difference between handing out money (remember shovel-ready projects) and devising a strategy with specific goals and tactics.
All told, Trump and team in charge reinforces the notion that things will get done on the industrial front.
However, these policy changes take a while… so the market is getting ahead of itself. It’s expecting changes to be made immediately. And forgetting that big government changes take a while.
KEY TAKEAWAY: It’s time to take the “Trump Trade” off.
In addition to the premature exuberance, be aware that additional headwinds are picking up. Oil is hitting $50. That’s hugely inflationary. And interest rates jumped. Both of these moves squeeze consumers, the lifeblood of our economy.
For companies, there’s even worse news: in addition to higher oil and higher interest rates, they also face a stronger dollar. That’s a sales and profit killer.
In effect, whatever good news Trump ushers in, for the next few quarters, the private sector will be in worse-than-expected pain.
But that’s just the fundamental economic view.
From an investor’s point of view, also remember that stocks come under pressure when bond rates go up: dividends are less valuable, for example.
Editor of Moneyball Economics
P.S. I am now ranked 4th most accurate forecaster of Private Payrolls by Bloomberg. Here’s a screenshot of the rankings.
Over a two year period, I have consistently beaten almost every other forecaster: JP Morgan, Citibank, UBS, Credit Suisse…
One reason is because I develop my own data.
Another reason is that I have worked in the industry and know first-hand how companies translate business activity into staffing decisions.
Having strong understanding of payrolls means that I have a strong finger on the pulse of the economy.
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Related podcast interview:
Andrew Zatlin on Trump, Google, and the Leaning Tower of San Francisco