Is The Trump Rally Over

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Is The Trump Rally Over?

When it became clear on election night that Donald Trump was going to win the White House, futures on the Dow Jones Industrial Average plunged by some 500 points as investors reacted to the shock populist victory. But within hours the mood swung dramatically and a bullish conventional wisdom emerged on Wall Street with the realization that Republicans were in control of the executive and legislative branches of the U.S. government.

The Wall Street rally that followed was built on the idea that fiscal stimulus, a mix of tax cuts and infrastructure spending, would power the U.S. economy forward and unleash animal spirits in America. Financial stocks led the way as Trump’s victory steepened the yield curve and raised expectations that deregulation would make banks and other industries great again.

President-elect Donald Trump reacts after speaking at Carrier Corp Thursday, Dec. 1, 2020, in . [+] Indianapolis. (AP Photo/Darron Cummings)

Since the election, Goldman Sachs has helped motor the Dow Jones past 20,000 points. Shares of big companies like Advanced Micro Devices and NVIDIA have advanced by more than 60%. CoreCivic, a private operator of prisons, has seen its stock price double. The Russian stock market has surged by nearly 30% and the U.S. dollar has strengthened.

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In early December, a bear case on Trump was tough to find on Wall Street. There were some isolated voices—hedge fund adviser Avi Tiomkin, for example, wrote in Forbes that rising budget deficits, interest rates and U.S. dollar would hit the U.S. economy and financial markets hard—and that limiting immigration would also hurt economic growth.

But in recent days, some major voices are sounding caution that the Trump trade may be coming to an end. Goldman Sachs’ economic analysts on Friday said “the balance of risks is somewhat less positive in our view.” The Goldman analysis drew concern from the difficulty Republicans were having just to replace Obamacare, saying it “does not bode well for reaching a quick agreement on tax reform or infrastructure funding.” Now, Goldman doesn’t expect any fiscal stimulus effects until 2020 at the earliest. Goldman also noted that Trump’s travel restrictions have further polarized Washington so bipartisan cooperation on anything seems more remote.

At the same time, the closely-watched billionaire hedge fund manager Seth Klarman recently sent a letter to his investors that reportedly described the stock market as having “perilously high valuations” and that investors are ignoring risks that Trump’s protectionist talk will produce trade policies that don’t work. Klarman, whose book on investing famously sells for $3,500 on Amazon, also wrote that Trump’s fiscal policy could cause inflation and leave the economy with a debilitating national debt. Klarman noted that Trump’s volatile temperament will cause the kind of uncertainty that investors generally don’t like.

Nouriel Roubini, an economist who warned about the credit and housing bubbles before the financial crisis, weighed in last week, writing that “the corporate sector’s animal spirits may soon give way to primal fear: the market rally is already running out of steam, and Trump’s honeymoon with investors might be coming to an end.” Roubini said the rise of interest rates and strengthening dollar could kill jobs and hurt sectors of the economy like real estate. Roubini also worried about Trump’s protectionist policies. “The President’s inconsistent, erratic, and destructive policies will take their toll on domestic and global economic growth in the long run,” Roubini wrote.

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Is the Trump Rally Over?

If you’ve been sitting on the sidelines of this rally, wondering if you will ever get the chance to buy a stock or two at a reasonable price, well, you’re in luck. The optimism bubble that’s carried stocks to their highest valuations in 15 years has finally popped. Your chance to buy stocks cheaper than they are now is coming.

I know, yesterday was just one day. That 29.45-point drop in the S&P 500 was just 1.24%. Not exactly a crash. Volume wasn’t as high as it was on Friday. Still, yesterday “felt” different, didn’t it?

In part it felt different because we haven’t seen a 1% drop for the S&P 500 in months. Even though all streaks must come to an end, we’re just not used to seeing stocks sell off like that. But there were a couple aspects of the decline that make me think there’s more downside coming.

First, there are small-cap stocks. While the big indices — S&P 500 and Dow Industrials — were down a little over 1%, the small-cap index got taken to the woodshed.

That’s the Russell 2000 ETF (IWM). It tracks the Russell 2000 small-cap index. It fell 2.74% yesterday, more than double the declines of the S&P 500 and Dow Industrials. That’s significant for a couple reasons. One, it represents a lot more stocks — 2,000, to be exact. The selling in small caps was widespread and rampant.

Two, small caps are generally considered to be more speculative than bigger stocks. Small caps tend to perform best as animal spirits get released during a rally. But when the rally turns, look out. The small caps tend to lead in the downside, too. And that’s exactly what happened yesterday. IWM sliced through the 50-day moving average (blue line) like a hot knife through butter.

The 50-day moving average is a common way to measure the medium-term trend. When the price is above the 50-day MA, the trend is thought to be up. When the price drops below the 50-day MA, the trend is thought to be lower. So that’s a pretty strong signal from IWM.

But perhaps an even stronger signal came from one of my favorite stocks, Bank of America (NYSE: BAC).

Financials Always Lead

It’s one of those stock market mantras: the financials lead the market. There is good reason for this, as banks are excellent gauges of economic health. Basically, when economic activity is increasing, people and companies are borrowing money. And when the economy slows, banks are often the canary in the coalmine. It’s no coincidence that the first sign of the financial crisis came in late 2007, when Meredith Whitney made her famous call that Citi was going to have to cut its dividend.

Now, the first thing I did when I took over as editor of The Wealth Advisory income and dividend newsletter in February 2020 was recommend Bank of America. It was just over $9 a share at the time. But its trajectory seemed clear to me. That is, it was going higher.

But check out the action from yesterday.

As you can see, the stock had been looking kind of weak over the last few days. But wow, Bank of America dropped about 6% yesterday. 259 million shares changed hands, which is a lot. And like the Russell 2000 ETF, Bank of America shares cruised through the 50-day moving average like it wasn’t even there.

Now, about those 259 million shares: If we look back over the last 18 months, we’ll see BofA traded that many shares right after the Brexit vote. Volume was heavy like that last January when the sell-off that welcomed in 2020 was reaching a crescendo.

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In both cases, Bank of America was very near its lows. In January, the heavy selling started with the shares around $13, and they bottomed out just below $12. In the Brexit case, those two heavy volume days marked the bottom for the stock.

So, go back and look at those first two charts I shared with you. Notice anything about where the heavy volume selling started? Yeah, the top of the trend, not the bottom.

Sure, that could be a one-day event.

But somehow I don’t think that’s going to be the case.

Trump Rally, Trump Correction

I’m not going to talk too much about this, but as we all know, this whole rally was based on Trump policy. Basically the belief that he was going to cut corporate taxes, roll back some regulations like Dodd-Frank that has hindered the banks, and maybe spend a bunch of money on infrastructure.

As I’ve written here before, the corporate tax cut alone had the potential to add $10 a share to S&P 500 earnings, which is significant.

You may also recall that I warned that if the Trump administration put off tax reform and easing regulations, and instead focused on Obamacare, the market would sell off.

It looks like that’s what’s happening now. The House is set to vote on the new health care bill tomorrow. Consensus is that it will not pass. That’s another defeat for the Trump administration. But worse, it dials back the clock on tax reform. Those corporate tax cuts could have come in 2020. That would have justified the rally. But now that we may not get those tax reforms until 2020, well, just look at those charts again.

So now the obvious question is: why now? We’ve all known that Trump was focused on repealing and replacing Obamacare first. Tax reform was clearly on the back burner. So why did it take so long for investors to question the underlying assumptions of this rally?

I don’t know. The stock market is funny that way.

Sometimes things get priced in right away, sometimes it takes a while. Home prices topped out in 2005–2006, but that bull market kept chugging for at least another year. Same thing with the end of the tech bubble in 2000 — the economy had already slowed when Greenspan hiked rates 50 basis points on May 16, 2000.

So anyway, what now? Well, I’m reminded of a joke from a movie about LA cops called Colors. Robert Duvall has an eager rookie Sean Penn as a partner. Duvall tells him this story about a young bull and an old bull sitting on a hill, watching a bunch of cows grazing in the meadow below. The young bull spies a cow he likes and says to the old bull, “Hey, why don’t we run down and [make sweet love] to that cow?”

The old bull shakes his head and says, “Why don’t we just walk down and [make sweet love] to them all?”

Until next time,

A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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Is the Trump Rally Over?

1 minute, 2 second read

There has been a lot of talk lately about the U.S. markets underperforming.

And that has been true.

Stocks soared after the U.S. election, but that pace of growth has slowed during 2020. Meanwhile, the rest of the world, as measured by the MSCI EAFE Index, is up significantly, making the U.S. a laggard on a global scale.

So is the Trump rally over, or is there another run higher?

Let’s take a look at a chart.

Below you will see the relative strength chart of the S&P 500 versus the EAFE. Basically, when the line is rising, the S&P 500 is outperforming, and when it’s falling, the S&P is underperforming.

You can see the outperformance the U.S. markets experienced since the election. Then the decline in 2020 represents the underperformance everyone was talking about.

As you can see from this chart, there are periods of brief underperformance, but in general, the S&P 500 is leading, and the breakout since the election likely has a lot more room to run.

For now, it’s best to take the underperformance as an opportunity to buy U.S. stocks, not sell.

Chad Shoop, CMT
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