November 6, 5:00 pm EST
In my note yesterday, we talked about the probable outcomes for the elections.
Whether we see the Republican’s retain control of the house, or lose it, both scenarios should be a greenlight for stocks.
Why? Because the cloud of uncertainty will be lifted. Even if we were to have gridlock in Washington, from here forward, the economy has strong momentum already, and the benefits of fiscal stimulus and deregulation are still working through the system.
Now, given today’s midterm elections are feeling a bit like the Presidential election of 2016 (as a referendum on Trump, this time), I want to revisit my note from election day on November 8, 2016.
As I said at that time, central banks had been responsible for the global economic recovery of the prior nine years, and for creating and maintaining relative economic stability. And creating the incentives to push money into the stock market (i.e. push stocks higher) played a big role in the coordinated strategies of the world’s biggest central banks. With that, I said “neither the economic recovery, nor the stock market recovery can be credited much to politicians. In this environment, in the long run, the value of the new President for stocks will prove out only if there’s structural change. And structural change can only come when the economy is strong enough to withstand the pain. And getting the economy to that point will likely only come from some big and successfully executed fiscal stimulus.”
It turns out, Trump has indeed executed on fiscal stimulus. And he’s gone aggressively after structural change too (perhaps too early, and with some success, but at a price he may pay for politically). Still, he’s been able to execute ONLY because he’s had an aligned Congress.
Importantly, the economic policies out of Washington have allowed the Fed to bow-out of the game of providing life support to an economy that was nearly killed by the financial crisis. That’s good!
November 5, 5:00 pm EST
The elections tomorrow are said to be a referendum on Trump’s Presidency.
And given the sentiment, I think it’s fair to say the surprise scenario for markets would be for Republicans to retain control of Congress. For that to happen, it looks like the Republicans would need to win 61% of the “toss up” races in the house. Of those, 84% are currently Republican held.
That scenario would be a vote of confidence for the Trump economic agenda. And for markets, it would be “risk on,” which would likely draw more attention to the inflation outlook, and the speed at which market interest rates will move. Trump would retain his leverage over China on trade concessions.
Scenario two, would be a split Congress. If we get a split Congress, the Trump economic plan would likely turn to infrastructure. The belief is that a Democrat led house would likely be a partner to Trump on a big infrastructure spend.
Though I suspect, given the political atmosphere, they may work to block any further progress on the economic stimulus front, in effort to position themselves for the 2020 Presidential election. On China trade negotiations, I suspect a split Congress would begin to fight against Trump’s executive order-driven trade wars. This scenario would mean, gridlock in Washington.
However, after the cloud of election uncertain lifts, both scenarios should be a greenlight for stocks.
Remember, we already have an economy running north of 3%, with record low unemployment, and consumers are sitting on record high household net worth and record low debt service ratios. Companies are growing earnings at over 20% (yoy), and growing revenues at over 8% (yoy). And corporate credit market debt is near the lowest levels (relative to market value of corporate equities) of the past 70 years.
So there is plenty of fuel in the economy to continue the trajectory of economic boom. Maybe most importantly, following the October correction, the tech giants have been pricing out the “monopoly scenario” which paves the way for a broader-based bull market for stocks.
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October 31, 5:00 pm EST
As we discussed yesterday, it’s very dangerous to let political views influence your perspective on markets and investing.
And I suspect we are seeing plenty of people make that mistake.
That means many will be left behind on a stock market recovery, again. That probably means the bull market for stocks still has a ways to run. John Templeton, know to be one of the great value and contrarian investors of all time, said “bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”
Incredibly, after a more than four-fold run from the financial crisis bottom, the stock market continues to have a LOT of skepticism. Does this mean we are only half way through this cycle? Maybe.
The arguments for the stock market bears and pessimists on the economy have many holes, but the biggest is the lack of context. That context: the global economic crisis, and the aftermath (up to present day).
You can’t evaluate anything about this economy without taking into account where we’ve been over the past decade, the role central banks have played throughout, the coordinated intervention that has taken place globally (along the way) to avoid a global depression, and the interconnectedness of global economies that continues.
Without this context, the skeptics like to call it “late in the cycle” for an economy that (on paper) is in the second-longest expansion in U.S. history. With context, we’re probably closer to “early cycle,” given that the decade of ultra-slow growth was manufactured by central banks.
October 30, 5:00 pm EST
This violent repricing of the tech giants came with clear warnings (i.e. the tightening of regulatory screws).
Now that we have it. And it is very healthy, and needed.
As we discussed yesterday, I would argue we are seeing regulation priced-in on the tech giants, which can create a more level playing field for businesses, more broad-based economic activity, and a more broad-based bull market for stocks. This is a theme we’ve been discussing in my daily note here for quite sometime.
And I suspect now, we can see the areas of the stock market that have been beaten down, from the loss of market share to the tech giants, make aggressive comebacks.
On that note, here’s another look at the big trendline we’ve been watching in the Dow …
Again, this line holds right at the 10% correction mark. And we’ve now bounced more than 700 dow points.
As I’ve said, it’s easy to get sucked into the daily narratives in the financial media, and it’s especially easy and dangerous (to your net worth) when stocks are declining. They tend to influence people to sell, when they should be buying.
And as someone that has been involved in markets more than 20 years, I can tell you that it’s also very dangerous to let political views influence your perspective on markets and investing. And I suspect we are seeing that mistake made in this environment (by pros and amateurs alike).
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