By Mitchell Anthony
The volatility in the markets continues to remain high as traders and investors digest the impact of the significant policy changes in play by the Trump administration. This administration has plans for change unlike any other administration in decades. The administration hopes to level the playing field on trade and relieve the burden on America from illegal immigration. Further the administration is not afraid to take bold steps to keep the Federal Reserve tuned in to the fragility of our economy. On the other side of the aisle we have the liberal Democrats who seem willing to sacrifice the strength of America for equality in the world and use whatever tool is at their reach to carry out their obstructive agenda. The FAANG’s thus far has been insulated from most of the policy changes at play by Trump. However the Dems have taken aim at the FAANG’s despite the liberal agendas of most FAANG companies, and plan to try to obstruct the business plans of these industries once the Dems take control of Congress. These are the problems that investors and traders alike are weighing into their investment posture. As a result our markets are 10% lower today than they were at their highs in September. Traders have left the markets and have taken speculative positions in bonds or safe positions in cash as they await better visibility on these issues. Investors have not yet changed their asset allocation as a result of these problems. Our objective is to create alpha for our clients and we seek to stay ahead of what investors do. We are carefully weighing whether investors next step will be to leave stocks for another asset class. Likewise we are carefully weighing whether traders will return to equities soon and push stock indexes to new highs.
The case for investors leaving equities hinges on another asset class becoming more attractive based upon the economic outlook. Currently we have an economy that is growing at the strongest pace it has in 10 years but is still very fragile. Higher rates or notable changes in global consumption could push our economy back toward modest growth again. This was the path our economy was on from 2012 through 2016. Historically this type of environment is quite friendly for stocks and we think would be friendly again for stocks should this occur. If significantly higher rates and significant declines in global consumption occur, then investors will likely allocate away from stocks and into treasuries and fixed income instruments. This pessimistic scenario is certainly possible but not the likely scenario. The more likely scenario would be a slip back to modest growth, or our economy staying on its current path of strong growth.
We believe Trump clearly has his eyes on reelection and is well aware that the strength of the economy going into the election will determine his fate. Trump is clearly embracing the problems of a four-year presidential term. Four years does not give a president a lot of time to get things done and then get reelected. Trump is attempting to make significant changes in policy for America and now has the associated volatility in the economy as his changes are digested. The Chinese unfortunately know that he will have to take his foot off the gas soon and worry about the status of the economy going into reelection. As a result they may be difficult to get to agree to fair trade or concede to much change.
The Chinese are challenging America for the title of the world’s economic superpower and Trump does not want to allow them to take this crown while they are immersed in corrupt unlawful behavior in the way they trade and disrespect American intellectual property.
Trump clearly sees the big picture of America losing its dominance in the world to a communist regime that cheats and has been unlawful and disrespectful of human rights, something quite different than most past presidents. Trump seeks to right this wrong but has his hands full and maybe not enough time to get it done before reelection. We hope he will be successful but realize the difficult path that lies ahead for him.
We believe Trump will change his position significantly on trade if concessions are not won in the next few months.
We believe the economy will move forward either through concessions from Trump, or the Chinese, and that a recession for America is unlikely in the next year. America is the gorilla in the room when it comes to trade wars. The Chinese will not win this battle should Trump decide to dig in his heels. We believe however that Trump will back down soon as he looks out for the best interest of America and his reelection. We believe the decision by traders to move to cash will be painful and the most timely asset is American stocks and the FAANG.
We remain focused on the daily data affecting the economy and the valuations in the markets.