Does This Trump Market Make Any Sense?
With stocks taking a breather, but still close to all-time highs, the so-called Trump market remains implanted on center stage. Wall Street, never lacking the nerve to claim every occurrence in the universe a sign that the stock market will go up, continues to beat the Trump drum steadily and loudly.
The question we might ask now, with the first hundred days now more than half over, is whether Trump's election will continue to propel the markets and the economy into a virtuous cycle of growth and prosperity. We suggest the jury remains out.
Meanwhile, despite recently catching its breath, the stock market shows no signs of slowing. Is this the sign of exhaustion that leads to a bear market? Hardly. For that you basically need everyone to be in the market - and that's simply not the case today. Besides institutional investors' cash, the retail investor remains fearful and on basically on the sidelines as well. Cash scattered by the wayside is not a characteristic of a market ready to turn south. But there's one more factor that needs to be considered here that we've never had to account for in the past: central banks.
We've already found a new and massive surge of central bank money cascading into stocks in Japan and China, two of the world's largest economies. Will the U.S. central bank be next? We don't know; but don't count it out. The subject's been broached by Janet Yellen, although a commitment hasn't been forthcoming - yet. And if that happens, we're likely talking billions if not trillions of new money buying stocks, pumping the market up to heights never before imagined.
Which brings us now to what a market looks like at the end of bull run: It's not what this market looks like. First of all the idea of "heights never before imagined" does describe the final stages of a bull market. Are we there yet? It doesn't appear so. Add that factor to all the cash on the sidelines. Now add the potential for the U.S. central bank buying stocks with abandon in the future. And if that happens, can the EU central bank be far behind? Finally, at the end of a bull market run, "everyone" talks about their investments, how successful they've been in stocks, etc. It's the old tale about the shoeshine boy bragging about his latest stock buys. None of that's been going on.
What about the argument that we may not see that aspect of the final stage of a bull market. The argument that it would be different this time goes like this: People were so traumatized by the 2007-2009 collapse of their stock prices, they've exited the stock market for good, never to return. If that's the case, this bull will have to end without them. But there's a counter to this, when you think about it: human nature.
Human nature, being what it is, may cause even the most reluctant of the beaten down masses to jump in if the central bank buying of stocks drive stock indexes high enough. What's high enough? Well, we've been reading a Dow of 25,000, 30,000, even 40,000 or 50,000 - more than twice the current level. On the one hand it seems fantastic. Indeed, such talk can be a characteristic of a market top. On the other hand, there does seem to be the possibility of the central bank buying scenario taking on a life of its own and boosting prices into those "heights never before imagined." After all, the CBs, having the power to print all the money they need without limit, can pretty much do what they want - especially in the case where stocks do indeed correct, causing our central bankers to hear the growling of a big hulking bear approaching. Don't put it past them to pull out all the stops to forestall a bear market.
Does all this negate the reality of a Trump effect? In the sense that the rally was based strictly on Trump's election, yes. In the sense that his election served as a catalyst to spur the market to its next leg up, no. But if it's just a catalyst, and it's completed the task, then we await the next catalyst to fire up the animal spirits in us all. And there we may indeed find even the fearful retail investor jump in with two feet. Only this time, that fear of buying stocks will transform itself into a fear of "missing out." And at that point we will hear everyone, including that legendary shoeshine boy, bragging about their success in the stock market. At which point the bottom falls out and they lose their money yet once more. Sadly, that's the lesson of history, and it's a lesson unlearned over and over again.
However this all plays out, at the very least the stock market remains something to keep our eyes on.
The question we might ask now, with the first hundred days now more than half over, is whether Trump's election will continue to propel the markets and the economy into a virtuous cycle of growth and prosperity. We suggest the jury remains out.
Meanwhile, despite recently catching its breath, the stock market shows no signs of slowing. Is this the sign of exhaustion that leads to a bear market? Hardly. For that you basically need everyone to be in the market - and that's simply not the case today. Besides institutional investors' cash, the retail investor remains fearful and on basically on the sidelines as well. Cash scattered by the wayside is not a characteristic of a market ready to turn south. But there's one more factor that needs to be considered here that we've never had to account for in the past: central banks.
We've already found a new and massive surge of central bank money cascading into stocks in Japan and China, two of the world's largest economies. Will the U.S. central bank be next? We don't know; but don't count it out. The subject's been broached by Janet Yellen, although a commitment hasn't been forthcoming - yet. And if that happens, we're likely talking billions if not trillions of new money buying stocks, pumping the market up to heights never before imagined.
Which brings us now to what a market looks like at the end of bull run: It's not what this market looks like. First of all the idea of "heights never before imagined" does describe the final stages of a bull market. Are we there yet? It doesn't appear so. Add that factor to all the cash on the sidelines. Now add the potential for the U.S. central bank buying stocks with abandon in the future. And if that happens, can the EU central bank be far behind? Finally, at the end of a bull market run, "everyone" talks about their investments, how successful they've been in stocks, etc. It's the old tale about the shoeshine boy bragging about his latest stock buys. None of that's been going on.
What about the argument that we may not see that aspect of the final stage of a bull market. The argument that it would be different this time goes like this: People were so traumatized by the 2007-2009 collapse of their stock prices, they've exited the stock market for good, never to return. If that's the case, this bull will have to end without them. But there's a counter to this, when you think about it: human nature.
Human nature, being what it is, may cause even the most reluctant of the beaten down masses to jump in if the central bank buying of stocks drive stock indexes high enough. What's high enough? Well, we've been reading a Dow of 25,000, 30,000, even 40,000 or 50,000 - more than twice the current level. On the one hand it seems fantastic. Indeed, such talk can be a characteristic of a market top. On the other hand, there does seem to be the possibility of the central bank buying scenario taking on a life of its own and boosting prices into those "heights never before imagined." After all, the CBs, having the power to print all the money they need without limit, can pretty much do what they want - especially in the case where stocks do indeed correct, causing our central bankers to hear the growling of a big hulking bear approaching. Don't put it past them to pull out all the stops to forestall a bear market.
Does all this negate the reality of a Trump effect? In the sense that the rally was based strictly on Trump's election, yes. In the sense that his election served as a catalyst to spur the market to its next leg up, no. But if it's just a catalyst, and it's completed the task, then we await the next catalyst to fire up the animal spirits in us all. And there we may indeed find even the fearful retail investor jump in with two feet. Only this time, that fear of buying stocks will transform itself into a fear of "missing out." And at that point we will hear everyone, including that legendary shoeshine boy, bragging about their success in the stock market. At which point the bottom falls out and they lose their money yet once more. Sadly, that's the lesson of history, and it's a lesson unlearned over and over again.
However this all plays out, at the very least the stock market remains something to keep our eyes on.
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