Markets operated on a basis of "risk on, risk off" between 2009 and 2011. That changed to a narrative of "Fed on, Fed off" from 2012 to 2016. Now a new age has dawned, says Convergex strategist, Nicholas Colas, with "Trump on, Trump off" becoming "the US equity market's new streetlight".
Faith in Trumponomics first sparked a big bounce, but growing concerns have since curtailed the rally. Trump’s willingness to implement controversial campaign promises indicates public protests will only increase, but Colas suggests “repeated images of mass protest” are not likely to derail markets.
Firstly, while markets have grown increasingly nervous, elevated asset prices indicate continued faith in the “Trump economic playbook” and a belief we are witnessing the “teething pains of a new administration”.
Secondly, investors should remember markets “don’t play politics”. Stocks rose 11 per cent in 1968, one of the most tumultuous years in American politics. They rose 37 per cent and 24 per cent in 1975 and 1976, in the aftermath of Nixon’s resignation.
Still, while domestic disaffection may not unduly bother markets, investors would prefer to avoid trade wars, geopolitical strife and incompetent policymaking. The ‘Trump on, Trump off’ streetlight is unlikely to be turned off anytime soon.
Dalio losing faith in Trump
One investor already having second thoughts about Trump is Ray Dalio of Bridgewater, the world's biggest hedge fund.
Dalio, who has made more money for investors than any other hedge fund manager in history, had previously welcomed Trump’s election victory, saying the new probusiness administration could unleash “animal spirits” that resulted in “huge” gains for risky assets.
There was one proviso, however, Dalio saying it depended on whether Trump is “aggressive and thoughtful” or “aggressive and reckless”.
In a note last week, Dalio warned he was “increasingly concerned” about Trump’s emerging policies. Warning of “nationalism, protectionism and militarism”, he compared Trump’s immigration restrictions and protectionist rhetoric to the governments of the 1930s, saying his “populist policies could hurt the world economy (and worse)”.
Dalio hasn’t given up hope just yet, saying he remains “open-minded”, but there was no further talk of animal spirits. Rather, today’s investment landscape is one of “exceptional uncertainty”; this is no time for big bets.
Volatility can’t go any lower
Amid ongoing talk of political chaos and uncertainty, one might have thought January would have been a volatile month.
Not so. The S&P 500's largest drawdown from a closing high was just 0.85 per cent, notes Bespoke Investment Group. The average daily change during the month was just 0.33 per cent.
In fact, the difference between the month's lowest and highest points – 2.5 per cent – was the smallest-ever January range, according to Ryan Detrick of LPL Research. Detrick notes that the Vix, or volatility index, traded below 10 last week, lower than 99.75 per cent of historical readings.
Investors should assume volatility will soon rise – it can’t go any lower.
January trifecta augurs well for stocks
Stocks rose over Christmas. They rose in the first five days of January. They rose in January as a whole. If history is any guide, they will also rise over the next 11 months.
The so-called January trifecta (or group of three events above) occurred on 28 occasions since 1960, notes LPL Research. Stocks gained over the following 11 months on 25 of those occasions, averaging gains of 12.7 per cent.
The trifecta is even more bullish in post-election years, according to Jeffrey Hirsch, author of the annual Stock Trader’s Almanac. History suggests full-year gains “could reach into the mid- to upper teens”, says Hirsch.
One caveat – to secure such gains, the Trump administration “will need to be largely successful implementing new policy changes with minimal disruption and confusion”.
“Minimal disruption and confusion?” That might be asking for too much, given the events of the last few weeks.
Losing the lot on Apple
You’ve blown most of a $2.5 million inheritance in dodgy trades and are down to your last $325,000, excluding personal debts. Do you call it quits or go for glory?
Canadian day trader FS Comeau apparently decided to go for glory, betting the lot last week that Apple shares would drop following their earnings report. Having announced his plans on WallStreetBets, a Reddit trading forum, he then live-streamed the earnings trade on YouTube.
As it happened, Apple shares shot upwards. Some 15,000 viewers watched the trader, wearing a wolf mask in front of his computer screen, lose his remaining funds.
A hoax? Probably – the trading screen was a demo account, Comeau saying he didn’t want to accidentally reveal his account number and address.
If it was true, however, he should be celebrated, argued The Fly, a widely-followed trader on the iBankCoin blog. “He still went for the glory, the ephemeral dream cast out by many Yolo [you only live once] wolves throughout history, as old as time itself.”
That’s one way of looking at it.
