No surprise that stocks took a break this week. Profit-taking from the election rally has been the main theme over the last few days for investors and could continue through the New Year.
As traders desert their desks for holiday shopping (present company included), volumes have petered out as world markets experience a consolidation. Remember readers that markets can correct in two ways: a sharp sell-off or this kind of sideways movement.
Frankly, give me a good old consolidation anytime. They may be boring, but sharp declines, especially around the holidays, makes for unhappy investors and can ruin the office Christmas party. I am actually relieved that we have had the Santa rally a little earlier this year. Over the last two weeks I warned investors not to chase the Trump rally. Greed has given way to common sense and another week or two of consolidation might relieve a large part of what I see as “overbought” conditions.
This week, U.S. investors did receive some good news. The economy actually grew by 3.5%, which was the fastest rate of growth in over two years. The third quarter results were fueled by strong consumer spending, higher food exports, and a revival of investment spending.
Of course, the Obama Administration will get no credit for the facts that unemployment is at historical low levels, GDP growth is finally revving up and wage growth is starting to climb. The new administration will take credit for this revival in investor’s minds. The same thing happened in reverse when President Obama took office 8 years ago.
George W. Bush left the Democrats with an economy in shambles, a financial crisis that rivaled the crash of 1929, and ultimately an unemployment rate north of 10%. Naturally, investors blamed the new guy for the old guy’s mistakes. Well, nothing is fair in politics.
The reason I am bringing this up, however, is to ask the question–how much of the “Trump rally” should be attributed to the Donald’s election and how much is simply a reflection of a turn in the economy that has been going on for the past few months?
Why, you might ask, is this important? Most pundits are crediting last month’s market gains to Trump’s elections. What if the gains were simply a celebration of a new-found strength in the nation’s economy? It would make the levels in the stock market reasonable, especially if investors expect more good news in the future.
Of course, the future is a lot less predictable now than it has been in the past. We still have no idea how many of the president-elect’s initiatives are going to bear fruit. In the meantime, the markets are being supported by the existing strength in the economy and a new-found “animal spirit” based on Trump’s campaign promises.
But there are a lot of questions in my mind concerning some of those promises. Let’s take the tax cuts that just about everyone is convinced are just around the corner. Tax cuts to investors, by definition are positive. But will corporations benefit from a 15% tax rate or a 20% rate? The difference is substantial, and exactly what will the fine print mean for various sectors?
What sectors will gain the most or will every corporation benefit equally? Will capital gains taxes be cut as well, and if so, by how much? Throw questions about the estate tax, individual income taxes and changes in both corporate and individual tax deductions (like mortgage deductions) into the mix and you may have some unexpected surprises. No one knows.
Then there is all this talk about a huge infrastructure program. Metals and mining stocks as well as cement, copper, steel, and God knows what else have doubled or tripled in the expectation that all these materials companies will benefit from trillions of dollars in government spending. Re-building the nation’s highways, hospitals, schools, bridges, airports, electrical grids etc. were certainly part of Trump’s campaign promises, but the timing and method of spending is open to question.
Trump has said in a post-election New York Times interview that infrastructure spending won’t be a core part of the first few years of his administration. He also admitted that a New Deal-type program would not sit well with the traditional Republican ethos. That’s not to say he won’t fulfill his commitment, but it might be so far in the future that the present prices of material stocks justify.
What we do know is that the new president will be unorthodox in his approach to many of the nation’s problems. He may very well cut corporate tax rates and at the same time take steps to eliminate corporate cronyism. He may get his infrastructure plan, but convince the private sector to foot the bill, instead of government. He has already showed his penchant for deal making via Twitter.
The point is that the best may lie ahead of us, but attempting to discount the future without the facts is dangerous at best. Fortunately, the growing strength of our economy has less to do with Trump, I believe, and more to do with the policies of the past, especially those of the Federal Reserve Bank. To me, the future looks promising under a new set of Trump initiatives and should be reflected in higher levels in the stock market going forward. I would use any pull-backs in the months ahead as buying opportunities.