As we move closer toward Jan. 1, 2019, there is likely to be something of a news vacuum (thank god!) which may free the markets from the "newsy" reactions (and volatility) so familiar over the last two months (in politics, economic data, etc.). Even Chinese trade chatter is likely to be diminished into the Christmas holiday. This should free up the market to "trade on its own" with some upside seasonal bias.
A Caveat: The Orange Swan Weighs Heavily on the Markets
I have but one important caveat regarding a year-end rally -- and that relates to whether we see more news of President Trump's potential legal liabilities and their impact on the markets. (Again, this is not a political statement -- rather it is a judgment of mine of how the uncovering of the President's past behavior and his current behavior may impact the capital markets).
Wednesday, the American Media coordinated "catch and kill" news appeared to be the proximate cause of a sharp downturn in stocks late in the afternoon -- in which the S&P reversed by approximately 35 handles. Regardless of one's political views, what may be slowly emerging is growing evidence being accumulated putting Trump in the room of the campaign violations. Though the case against the President is not an easy one, in order to prove beyond reasonable doubt (it's a "he said, she said" situation), the White House seems unprepared for a legal crisis in the "Presidency of One" -- manifested in more frequent tweets and in his public pronouncements.
Importantly, any further news on the Mueller or the Southern District of New York fronts could destabilize markets at any time and disrupt a continuation of an expected year-end rally.
A consistent theme of mine (first delivered in my 15 Surprises for 2018) is that the uncovering of President Trump's past and current behavior may adversely impact the equity markets (by increasing both volatility and economic uncertainty - e.g. China trade talks) -- and this has been the case over the last nine months.
As I wrote this week in the Top Ten Reasons Why We May Be Entering a Bear Market:
President Trump is Making Economic Uncertainty and Market Volatility Great Again (#MUVGA). Trump's more frequent and incendiary twitter utterances and behavior reflects badly on him, his office and our country. His conduct and policy (often seemingly written ad hoc on the back of a napkin) are arguably beginning to adversely impact our markets as his Administration's dysfunction and policy (conflated with politics), and have begun to reduce business and consumer confidence and is starting to negatively influence the real economy.
We are in a unprecedented politically toxic and divisive backdrop - which was underscored during Wednesday's funeral for President George H.W. Bush. As my good pal Mike Lewitt ('The Credit Strategist') wrote over the weekend in The Credit Strategist, "The saddest thing is not that Bush passed - it was his time - but that his generation is succeeded by a bunch of greedy, narcissistic empty suits." This is happening at a point in history where the world has grown more complex, interrelated, networked and flat. With these conditions in place, there are more dominoes today than yesterday and more yesterday than the day before. Again, from Mike,"The next crisis is approaching and not only is it self-imposed but we are ill-equipped to manage it precisely bc there are few men like George H.W. Bush to lead us."
a. The United States is leaning more and more "purple" - moving to the Left at a time that the Right is feeling terribly insecure after 10 years of The Screwflation of the Middle Class (something I initially discussed in an editorial I wrote for Barron's in 2011). The schism between the haves and have nots has not been addressed by policy (and has been worsened by the trickling up from the tax bill, which was intended to trickle down and by such provisions as real estate tax and mortgage interest limitations which have served to dent the residential real estate market). Further neglecting or failing to narrow this split will likely have grave social, economic and market ramifications down the road (or sooner).
b. It is becoming increasingly clear that the 2016 election was materially a vote against Hilary Clinton. Trump's road to nomination in 2020 is growing more precarious and the odds, after barely winning the first time, are not favorable that he wins reelection (given the Wisconsin voting results as well as the outcomes in Michigan and Pennsylvania). It is hard to see markets prospering with Washington D.C. in such a mess - preventing anything from getting done on deficits, debt, taxes, spending and infrastructure.
c. "The Orange Swan" has grown increasingly untethered in the face of divisive and extremely partisan midterm elections (that brought the House under Democratic control), the implicit threats of the Mueller investigation, the hostility of the Kavanaugh hearings, the controversy surrounding the Khashoggi killing, etc. The White House's dysfunction and repeated personnel changes would be laughable if they weren't so sad. Most recently, a hardline approach on trade (with China) seems to have tipped over the markets in recent days. Increasingly, short term solutions are being advanced in the face of long term problems. (A classic example is our burgeoning deficit, endorsed by both parties, that is unchecked and is running wild this year).
d. As we are move further from the midterm elections. my core expectation is that the President will likely be impeached by the House. Though there may be far less reasons for Senate Republicans to tie their political futures to such an individual - especially with a plethora of qualified Republican presidential hopefuls - the Senate vote on impeachment could be closer than many expect.
I remain net long in exposure.
Markets appear headed for a continuation of the rally (that started late last week) into year end.
More than half of that rally has already occurred.
As we move closer toward the Christmas Holiday, a news vacuum should develop, allowing for the normal seasonal market strength.
The one caveat is any incremental news related to the President's growing legal challenges.
(This commentary originally appeared on Real Money Pro on Dec. 13. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.)