FYI | Sep 10 2019
By Peter Switzer, Switzer Super Report
Stock outcomes hinge on this current P.O.T.U.S.
A subscriber emailed me recently pondering the value of being led astray by a Trump tweet. He even suggested that the US President is guilty of breaking stock exchange laws. It got me thinking about the positive or negative impact on our wealth building since November 2016, when Donald J. Trump became this very unusual President of the United States of America.
This is what the email put forward: “Have you ever considered that the one thing well established is that Trump lies a lot. It has pretty well been established that the phone call supposedly from the Chinese seeking a solution, which he talked about at the end of the G7 meeting, never happened. Undoubtedly, he is in breach of market manipulation laws and opens himself up to class actions from investors who suffer losses as a result of relying on his tweets. I do not know if it is a good idea for the media to give credibility to statements emanating from him or his cronies. What do you think?”
It’s a thoughtful question. Answering it has to bring a wide-ranging analysis, which might also help us decide if we should invest/gamble on what the President and his team say or tweet.
Right now, the President and his economic advisor, Larry Kudlow, are trying to portray the October trade meeting in Washington as negotiations at a “higher level” and Chinese communiques on the same subject have been more conciliatory than others we have seen since May, when the public messaging was reduced to trade trash talk.
The market always reacts negatively to bad trade deal news and vice versa, making it believable that a trade truce would send stocks surging higher.
As I’ve said before, Professor Jeremy Siegel of the Wharton School at the Uni of Pennsylvania thinks a 20% spike isn’t out of the question. If he’s right, it has to be keeping a lot of us fully invested on the basis you wouldn’t want to miss out on any trade truce leg up for Wall Street, which would carry over to our All Ords.
Of course, the flipside is that if the tariff escalation tit-for-tat show continues between the US and China, then we could see a 20% collapse of stocks. I think the slide could even be bigger because the global economy is struggling with recession threats and a Wall Street crash would be the straw that breaks the camel’s back.
Trump and Kudlow know this and could be angling for a short-term solution that will appease market fears. On Friday, Kudlow, who over the past week has been saying stuff to make us think that a deal is a chance if the October talks go well, told us that this horse-trading could go on for years because there are so many Chinese wrongs on trade that need to be righted.
I don’t have a psychology degree, so working out Donald’s agenda and negotiating style is guesswork. But I remain convinced that he’d prefer a deal leading to a stock market spike across the usual strong time for shares (November to April) before rolling into the second-half for 2020 and the November election.
Since Donald assumed power, there has been a 28% increase in the US S&P 500 and the Australian market has also followed suit (see chart below). And even the trade war over the past 18 months hasn’t stopped stocks rising.
And this chart of our GDP growth shows the local economy hasn’t been a big help for the stock market.
And the usual mainstays — the banks — have not been the usual power drivers of the S&P/ASX 200 Index. The Royal Commission and APRA’s impositions have taken the wind out of the banks’ share price sails so the lead from Wall Street has consistently been a key influencer. Over the Trump era, CBA has gone from $76 to $79.
Over the same time, another big market driver, BHP, has gone from $25 to $33, before the dam collapse at Vale’s mine pushed the share price to $41. The Trump era didn’t impede iron ore’s price, helping to add 44% to the big miner’s share price.
Trump tweets are market impactful, with a paper from The University of Nottingham showing “that a tweet by Trump leads to statistically significant abnormal returns that last for 2 to 3 trading days…[and] Trump’s tweets lead to an abnormal trade volume of 43.54% on the day of the tweet and an increase in Google search activity on the week of the tweet.”
But while the Trump effect has been very positive since November 2016, Forbes’ John S. Tobey says that “since its tax-bill peak nineteen months ago, the Dow Jones Industrial Average has barely moved – up only 180 points (0.7%) from 26,617 to 26,797.”
But wait, there’s another take on the Trump effect.
“However, in terms of daily point moves (up or down), the DJIA has gone around the world three times: Traveling fully 75,000 points, with much of that driven by President Trump’s tweets,” Tobey calculates.
Also, global growth hasn’t benefited from Trump’s trade war, as the chart below shows.
Clearly, the Trump tax cuts and other reforms were good for US stocks but since the trade war, the ups and downs of Wall Street have nearly cancelled each other out, with recent gains linked to the recent positive news on the trade talks.
Meanwhile, the global economy has turned down and the trade war has been no help and has undoubtedly been a contributor.
This global economic downturn and a slowing US economy can’t be ignored by the Trump economics team. It adds to the case that the President is being influenced by the stock market’s cry for a trade deal. It’s why I remain fully invested in stocks but I know it’s a risk.
Last week we saw positive trade talk news lead to a fall in the gold price and a spike in growth stocks, iron ore prices and so on. This is a sneak preview of what would happen if a trade deal happens. I hope to hell I’ve read this very unusual US leader right!
And there’s one final big plus for stocks if a trade deal can be had. Rob Kapito, who oversees the $10 trillion Blackrock fund management business, says the lack of investable assets (with decent returns) means quality stocks will be targeted by those investors sitting on, wait for it, $US50 trillion worth of cash. “We’re in a world that is flushed with cash and is underinvested. And therefore my global outlook would be for stock markets across the globe to continue to grind higher, and for rates to stay low for longer.” (AFR)
Gotta hope this guy got his job because of his brains and not for who he knew!
Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.
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