It’s time to Break It Down!
“We’re gonna win so much you may even get tired of winning and you’ll say please, please Mr. president, It’s too much winning! We can’t take it anymore!” – Donald J. Trump May 20, 2016 Albany, NY.
There are an abundance of theories about why Donald Trump won. I have neither the time, nor the inclination to enumerate and or expound upon them. No matter how many hypotheses there are floating around, being analyzed, or enthusiastically debated, about Trump’s victory, there are even more excuses and rationalizations for his idiosyncratic, if not bizarre methods of governing. I’m not going to invest in parsing those either. Instead, I will spend a few minutes framing an element of perspective around Trump’s bodacious and ridiculous claim, compared to where we find ourselves today.
According to CNN Business, few if any Wall-Streeters can recall the last time the Stock Market had a December as tumultuous and downward trending as the one we’re experiencing in 2018. For context, both the Dow and the S&P 500 are currently on track for the biggest December loss since the Great Depression.
As of Monday, both the Dow and the S&P 500 were down around 7.8%. That’s the deepest dive for each of the key Market barometers since 1931, based on data from LPL Research. Of course, the Depression-era losses were even larger: the Depression S&P 500 dropped 14.5%, while the Dow plunged 17%.
Nonetheless, the current swoon is making investors nervous. There is a growing feeling that earnings growth may have peaked this year. Analysts are concerned that the economy could stall in 2019 because of continued trade tensions with China, and rate hikes by the Federal Reserve. The Dow and S&P 500 are in the red for the year, putting stocks on a course that would lead to their worst annual loss since the 2008 Great Recession (Bush numbers) – and the first annual loss since 2008.
There is still reason for some hope that markets will turn around in the final days of the month…and year. December is typically a strong month for the market. Professional money managers tend to buy top-performing stocks to make their portfolios look good – a phenomenon known as window dressing.
There is also a somewhat more mysterious factor, known as the Santa Claus rally effect. As a rule, the market usually does well in the last week of the year, which some observers consider a function of light trading volume, with so many people off for the Christmas Holiday.
Volatility is still a key disruptor. Stocks started strong yesterday, but the Dow, S&P 500, and Nasdaq all turned lower in late afternoon trading. They staged a brief rally near the end of the day to close flat to modestly higher.
All that brings us to what, for the sake of this post, I’ll call Trumponomics, or Trump metrics. Donald Trump has, in addition to launching his “Winning” manifesto, spelled out in the opening paragraph, frequently used the stock market as his personal poll. You may have noticed, as the market has undertaken a declining trajectory, he has not only avoided that practice, he has also cast blame on the federal reserve for the economy’s difficulties. It is worth noting, the Dow is 1,000 point lower than when Trump signed his tax reform bill into law a year ago.
That is a result many investors find shocking. Over several decades, they have become accustomed to winning. The S&P 500 has boasted double-digit returns in 7 of the last 9 years. Last year the return was 22%. Investors expected more of the same this year, especially after Trump and his fellow GOP supporters promised the new tax law would, in effect, let the good times roll.
In general, the economy has been strong. Unemployment is at the lowest level in a generation. What then, is the problem?
There is an overarching view that 2018 was a year yielding peak earnings that simply cannot last. The boost from corporate tax cuts will fade. The trade war with China is raising the cost of doing business. Moreover, interest rates are beginning to rise. It is likely the Fed will hike interest rates a fourth time this year to keep the strong economy from overheating.
After the recession, interest rates hikes were minimized to resuscitate the economy. Now that the economy is healed, the Fed is raising rates back to a more neutral place on the policy spectrum. The increases have been nominal so far, because raising them too quickly could stall economic expansion.
It’s worth noting, signs of slower growth are emerging in faraway places from China to Germany. In fact, according to Greg Valliere, political economist at Horizon Investments:
“There’s a fear of weaker economic growth virtually everywhere, as the world emerges from quantitative easing and confronts tighter monetary policy. That, in a nutshell, is the greatest concern.”
I suppose, despite all of the preceding reasons we might instinctively proceed with caution, we can all relax, because, after all, Mr. Trump, advised us he hires only the best people, he is a stable genius, and in his own words, “So Much Winning:” That Was His Promise!
I’m done; holla back!
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