“Has Trump killed the Bull Market?” That was a headline from one of our research sources this week. The title is certainly an attention getter, and many investors have been no doubt thinking this was possible, if not probable. But remember, Politics rarely drive Markets. Earnings and economic activity take that role. To be sure, Politics absolutely influence Market activity. Government policies can both help and hurt investment as it applies to tax treatment and regulation among others. But earnings and economic cycles are much more powerful and natural. They’re demand driven. Politics feed on emotion, which can be enhancers and detractors from progress. These are indeed emotional times in which we live. We do not think the Bull Market is coming to an end quite yet. We have however prepared for increased volatility.
The Market finally got rattled this week as the issues at the White House continued to escalate and the severity of the situation grew by the minute. For most of the 7 months since President Trump was elected, the Market has taken his controversial and unconventional behavior in stride. The focus has been on earnings and economic acceleration. Both have been better than expected. That is a really good thing. But it feels a little different now, and the controversy surrounding classified intelligence and Russia is catching up to the President. The prospects for tax reform and other pro-growth policies are seemingly slipping away while the White House scrambles to maintain composure. The Market doesn’t like it and has begun repricing those expectations. Wednesday brought the biggest selloff on the year. But keep in mind the S&P 500 hit a fresh, all-time high on Monday. The week ended on a high note for stocks, but the weekend no doubt will be full of more news and events.
Things still look ok under the hood, no cause for panic yet
The credit markets are functioning properly. That wasn’t the case in previous corrections. The yield curve has flattened a bit, but mostly because the front end has increased, which is normal with expected Fed rate hikes. The Dollar is weak, and has been for a while. After hitting 15 year highs, the Dollar has erased all its gains for the year, and is back at the level it was ahead of the election. This is important because it suggests that the Market believes there is risk to a strengthening US economy and the stability and predictability of the US government is actually in question. But a weak Dollar is good for American products overseas. The only problem is, global markets are still mired in the debate about free trade and fair trade. That will likely continue. Our sense is the Fed will be a little more careful with their interest rate hike campaign now, in light of the Washington turmoil. A rate hike in June is still likely, but beyond is very much in question. For the first time in years, money has been flowing out of US assets into international stocks. Gold has also been a recipient of money leaving the Dollar. We like our exposure in both these areas, which we began building last year.
It was a big week for Oil, which broke above $50 again. Russia and Saudi Arabia, the 2 largest oil producers, agreed to extend production cuts for the rest of the year in an attempt to drive the price higher. They’re also combatting the continued production acceleration in Texas. But global demand is increasing, largely driven by India and China. The global economy is showing signs of acceleration. Energy stocks have had a tough go this year, but we believe higher levels are ahead.
Earnings Season is basically over, and was very solid, with the S&P growing earnings over 13% in Q1. It was the best quarter in years. But the focus has turned towards Geopolitics, which brought more volatile price action to the mix. So many investors haven’t trusted this rally and are shocked that the Market has gone up as much as it has this year. This Bull Market is definitely in the latter stages of its life. Low rates and slow growth are unique characteristics that could make it the longest in history. Right now it’s second only to the Dot.comrally in the 90’s. As famed investor John Templeton eloquently said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria”. There is no euphoria today, a dominant characteristic from the 2 prior Bull Markets that ended very poorly. But Bull Markets don’t move in straight-lines either. We are not getting overly aggressive to protect the downside, as we still think there is more life in this Bull yet. But we did raise cash and initiate a hedge for a reason last week. A healthy correction is coming; the only question is when. Tighten those belts and hang on for the ride. We’re all over it.
Have a nice weekend.