Stock Market Signals

The Bear can eat Donald Trump

It's the Economy, Stupid.

Donald Trump has a story he wants to tell in 2019 and 2020: That his exciting, unpredictable, America First, rule-breaking Presidency is good for America and we are great again

But not if we are in recession and the stock market has tanked.

The economic issue is the key.  

The race and culture war issue will benefit Trump. Democrats are likely to make it easy for him to characterize Democrats as the ones all upset about identity and race, while he is simply trying to assert that white people and Christians are people, too, and that they are innocent victims of "reverse prejudice." Polls show that whites already feel this way, so Trump's task will be easy. 

It will be made easier by the Democratic primary, which will nudge candidates toward voicing sympathy for the grievances of the historically disadvantaged. The fact that Democrats are factually and morally right is politically less important than the fact that a majority of white men (and the women married to them) don't believe it, and they will hear a message of exclusion.

Especially when combined with a robust economy, Trump can win.

I predict he will not be lucky. It's the economy, after all. 

For thirty years I followed investment markets closely. Today I am looking at signals, ghostly and uncertain indicators that make me think that a reversal is due. Indeed, it is underway.

Any politician who claims credit for a great stock market is doomed, before long, to pay a price. This is a lesson I learned in my thirty years as a Financial Advisor. The universe punishes people who take credit for stock market gains. 

Trump bragged. Karma.

Strong markets and strong trends tend to reverse themselves, to clean out the excesses and over-optimism that comes from investments that work out too well. Easy money moves to excess, it piles on, but then reality returns, and some unwary latecomers lose money, thus flushing out the errors in investment and resource allocation.

1.The stock market is not cheap. There were some good reasons for high valuations of investment assets. The Fed's zero interest rate environment--necessary in my opinion to stabilize the economy after the financial meltdown of 2008-2009--meant money flowed to risk assets. 

Not cheap.

Now the Fed is steering us back toward more normal interest rates. This means that investors now can get yield in something safer than stocks. Measured by historical earnings levels, people are paying too much for stocks, at least according to Robert Shiller, who studies long term valuations of the market. Regression toward the mean would be a significant drop in valuations. (Others, disagree, of course.)

2. Sugar High.  At a time of a strong economy Trump and the GOP increased the budget deficit, rather than use the prosperity to begin paying debt down, which Bill Clinton had done back during the late 1990s cycle. Trump and a compliant Congress added debt just at the time the debt is becoming more expensive (rising rates.) Moreover, since we are in full economy the things done with the money were less productive than they would be had the new debt been done at a time of idle capacity. Waste and debt catch up with people. 

3. Buy-backs. Corporations used the tax cut money to buy back stock. It moved asset prices higher but did not expand the capacity of the economy. The investor class got richer, which is pleasant for them, but the gains weren't used to create future capacity.

4. Market signals. When interest rates rise, and especially when short term rates equal long term ones, we fall into a recession and the stock market falls. This is underway.

5. Labor markets. I see help wanted signs everywhere. Isn't that good?   Yes. But I consider it a sign of the full tide of a cycle, rather in the way that the long days of late June signal to me that a change is due. It is too good. The world reverts.

6. Housing prices cool. Oil prices have fallen some 30%.  Demand is softening.

The stock market is down 15% generally and the NASDAQ is down 20%. Something is happening now. Recessions are not a mistake. They are normal. Time to flush away some of the excess.

What does this mean for Trump?

It means that when he runs for re-election there will be an alternative theory floating around, one confirmed by the economy, that Trump was actually bad for America's economy. The realization will be the rich got richer but the average guy got screwed, and now there are economic problems. 

Warning to Democrats: Trump will blame this on them and he will brand this the Democratic Slowdown. Be ready with your own branding: Trump Bust.