I'm hearing that the new market dynamic is "Trump on, Trump off." That what's driving the market every day it seems. One day people are excited about the prospects of Trump and his stimulus plans (of which we really know nothing yet) and the next day they're fretting that the stimulus plans won't come to fruition. So it creates this manic, one day up, one day down, type of market action.
Can you believe that people trade and invest like this? It's insane.
I remember a similar thing five or six years ago when it was the "risk on, risk off" trade. That focused on Europe and the problems they were having. Would Greece and the periphery countries default or would the ECB bail them out? Today they would; tomorrow they wouldn't. So it became one day up, one day down. Absurd.
Back then I traded against that manic display. Once the ECB stepped in to buy the bonds of countries like Greece I knew the crisis was over, yet the "zombies" kept dancing their risk on, risk off dance. Whenever it was risk on, I bought and I won. I rode the market all the way up.
Right now, I don't know about Trump. I prefer to take a wait-and-see attitude. However, there are things that are pushing me more toward the bearish camp and I have been expressing those thoughts in my columns here.
For one thing, despite Trump's great talk about creating jobs and rebuilding national infrastructure, he's stacked his team with fiscal hawks, and they have a willing Republican Congress ready to go along with major spending cuts.
Secondly, Trump himself talks about wanting to reduce debt. He's purportedly asked his team to come up with spending cuts -- potentially big ones. That would also be bearish. As I explained yesterday, the private sector needs dollars for the economy to run and the only way they can get dollars is for the government to spend them into existence. Reduce the government's debt and reduce the private sector's income and assets (wealth). That is not stimulative.
Then there's the Obamacare repeal and the likely cuts to billions in government subsidies for insurance premiums to those who can't afford it. There's incoming HHS Secretary Tom Price's desire to cut Medicare and Medicaid.
In other words, there's a lot to be concerned about on the growth side.
On the other hand, government spending is rising once again year-over-year and we just came off the second-highest spending year on record. If left alone that would be bullish for the economy and the stock market.
There's the Fed raising rates, which is essentially adding income and assets to the economy, and while the rate hikes may reduce stock prices temporarily (a downward "multiples" adjustment) the added fiscal flows will help sales and corporate profits over the long term and that will be supportive.
If Trump really goes ahead with a big fiscal stimulus, without the offsetting cuts to spending, that would obviously be very, very, bullish for the market and the economy. Even if he just leaves everything as is that would also be bullish. However, if he zealously pursues spending cuts and deficit reduction then there is no question we go into a recession.
A lot is going to happen after tomorrow. A lot. And I will see it in the flows from day one. There's no need to guess right now and there's really no need to buy one day and sell the next on something so mindless as a "Trump on, Trump off" trade. I'll take those folks' money. Easily.