Don’t expect a Trump market sell-off unless…

Founder and Publisher of the Switzer Report
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By now, most of you would have worked out that stock markets don’t go up in straight lines. You should also have learnt that when market indices put on over 10% in the space of two months, a pullback has to be on the cards.

Paul Rickard and myself have been saying as much in print, on TV and on radio and we’re basically in that phase now.

Saturday’s inauguration speech could have created another leg up, if the 45th President of the USA was more presidential and less populist. Alas, that’s a game that has worked for the electorate but it might be less acceptable for stock market smarties.

Frankly, the speech should not lead to a massive sell off but could keep low-level volatility on the cards. If reporting season and the economy turn ordinary, then I’d expect a stocks dumping. However, as I expect the opposite, it means over the next three and half months (the President’s first 100 days) we will see the market keep testing Donald’s output.

Of course, if the President goes hard on tariffs on the Chinese, Mexicans and German carmakers and the US economy and reporting season disappoint, then I’ll be changing my tune. As I say however, I don’t expect any of this.

Bill Stone of PNC Asset Management thinks Wall Street is having an indigestion problem because the post-election rally was such a gorging affair.

“A lot of it has to do with how strong things were. When you look at the really strong areas — financials, energy, small caps — they went on a tear post-election,” he argued.

He still likes these sectors going forward and expects to see the Dow crack the 20,000-level, as new highs happen in 2017.

February is not a great month for stocks and that’s why I’m preaching caution, while January tends to be good but we got so much gain in November and December, in terms of stock price gains, you have to expect a pullback.

Of course, if Donald goes rogue, then the pullback could be more substantial but I’m not expecting this and neither is JPMorgan’s CEO, Jamie Dimon, who sees the Trump presidency as an “opportunity”.

The S&P 500 started January at 2251.57. After the inauguration speech, it was at 2271.31. So the analysis of Saturday’s effort by Trump will be important in determining the result for the index over this month. The US economy remains strong and so company reporting will have a closer focus.

That said, what Trump says, tweets and does in the first 100 days will be centre stage.

Stone says the stock market goes up 7% on average in the first year of a new President. However, 75% of the time, February is not a good month for a new US leader.

Nearly 20% of US companies in the S&P 500 index will play show-and-tell with their profits, revenue and outlooks this week and this will be big news. Meanwhile, the Q4 economic growth number on Friday has the potential to help or hurt the market.

One final point. Republican presidents in the first year don’t have a great record!

The US stock market has fallen on average 1.8% for two-thirds of Republican leaders in the first year since World War II. However, with a Democrat in the White House, the average gain is 17% and a positive market happens 89% of the time!

That said, I interviewed Sam Stovall, the  chief investment strategist at CFRA, when I last took my TV show to Wall Street, and he said “the theory has been that Republicans inherited a mess made by Democrats, but instead it may be a matter of timing. Every Republican president since Teddy Roosevelt has had a recession in their first term.” (CNBC)

Making it possible for me to make the risky statement that “this time it’s different” is the fact that Trump is very different and the USA is not in a recession, nor likely to be in one.

Trump is promising to spend like a Democrat and tax, as well as regulate, like a Republican. This could be very positive for stocks in 2017, at least.

Stovall think history tells him the S&P 500 could see 2355 this year and that would be only a 3% gain from here. However, from the start of the year, it would be a 5% gain. I think the Yanks will do better than that and we will see 6000 and then 6300 on our market index, provided Trump plays a smart game.

I know Trump-haters point to his failures but he has had plenty of successes, as last Friday and November 8 proved! Let’s hope he brings his A-game to the Presidency. If he does, our portfolios will benefit.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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