“All lies and jests, still a man hears what he wants to hear, and disregards the rest.” – Paul Simon, The Boxer
Well, that was something, wasn’t it? Count me among the many taking his lumps this week for pre-election forecasts – not over which candidate would win, which is now plaguing pollsters and assorted experts, but over the market reaction to a potential Mr. Trump win. I wrote that the market would likely correct by 10%-20%, and here we are higher a week later, with the Dow Jones industrial average at an all-time high, no less.
I and my fellow prognosticators were right, however briefly, when the futures market plunged Tuesday night on the growing prospect of a Trump victory. Indeed, S&P futures were down the maximum of 5% at one point in the overnight session (at that point circuit-breakers kick in and trading is limited). I was regretting unloading my S&P put positions in advance of the election.
But then Mr. Trump surprised the markets and many others with a conciliatory speech that was straight out of a New York Elks club dinner, thanking faces in the crowd, talking about beautiful life is, what a great year we had and the like. It showed off the essential New York City aspect of Mr. Trump, something the media seemed to overlook in the midst of his many pugnacious and outlandish remarks. Mr. Trump is of course from Queens, a borough of New York City, where rich and poor alike slip combative attitudes on and off as easily as pull-over sweaters. Lacking the political career that might have imposed more caution over time, at times he has reminded me of tennis great John McEnroe – also from Queens – who by his own admission often thrived on the adverse reactions to his mercurial temperament (it also cost Mr. McEnroe some titles, by his own admission, when he lost his composure and couldn’t recover. Something we might want to keep in mind).
The futures market reversed after the speech, the market opened only slightly and briefly down the next morning, and by mid-morning the Brexit-copycat trade was in full flight. There is nothing Street traders love more than the thundering of the herd over a short position gone wrong, above all when disaster is predicted and then fails to live up to its billing. Notes and opinions flew across trading desks that Mr. Trump was only kidding with the wild stuff after all, and so you had better get busy trading his economic program – buy anything infrastructure-related (copper and steel were huge beneficiaries), sell bonds (inflation is coming, along with the tax cuts) and last but not least, the fondest maxim of all: if you wait for the move, you’ll miss the move.
“After all” may be the operative phrase of the rest of the year. After all, Mr. Trump really didn’t mean this, after all, Mr. Trump really has to do that, and so on. I don’t think any of us really know what Mr. Trump will do (though there are certainly some indications), and I never believed that Mr. Trump himself was sure of what he was going to do. He was busy running his campaign in his own pugnacious, off-the-cuff, winging-it style, and it will probably only be over the next two months that he begins to make some real decisions on what to do. That he will feel obliged to keep some of his promises, I have no doubt, but which of those he will or will not give up on, I have no clue and suspect that he will change his mind (or not) as he sees fit. He is not Ronald Reagan, ladies and gentleman, who had twice been governor of California before running for president. He is sui generis, and we are in for some surprises.
I was especially struck by the reactions on the business news Wednesday, as businessman after business man, strategist after strategist, seemed to sincerely believe that they had heard Mr. Trump’s message in a way that especially suited them – and disregard the rest. For now, Wall Street and others are engaged in widely differing strains of magical thinking – the economy will roar ahead on $1 trillion of stimulus spending, immigrants are going to leave and give us all of our jobs back, somehow the rest of the world is going to let us do whatever we want on trade and we will get even more jobs back. I could go on, but you get the gist.
Having been badly singed last week, it may not do for me to be making more predictions at this stage, not in the policy sphere anyway. What I can point out is that Mr. Trump is going to inherit most of the same problems that Ms. Clinton would have been saddled with – a business cycle that has been slowly but surely ending, a richly-priced stock market begging for a bear cycle (but when, nobody knows), and an economy likely to prove surprisingly resistant to Mr. Trump’s stimulus plans. Congress might be resistant too, going by Senate majority leader Mitch McConnell’s recent lack of enthusiasm for big infrastructure spending. Trump is likely to get something through, given that he won the election, but it won’t be as big as he promised, will probably mean some cuts elsewhere and will take longer to get going than the Street seems to think. The best times for stimulus spending are coming out of a recession with high unemployment, not at the end of the cycle with employment essentially already full. It is possible to run employment rates down below their natural levels, but that is more likely to create inflation than anything else. Indeed, Goldman is already talking about stagflation possibilities.
Bonds, in particular those from governments and emerging markets, have tanked on the prospects of huge deficits from the combination of tax cuts and deficit spending. While I’ve no doubt that Congress will be eager to pass some form of tax cuts, particularly in the corporate sphere, lurid headlines of massive deficits are something that the House of Representatives is not going to want to confront and I imagine many will not be happy about the prospect. Much of the infrastructure opposition will of course melt away now that Republicans can take credit for the bridges and roads instead of Mr. Obama, but even so, Mr. Trump may find some heavy weather next year. In 1976, Jimmy Carter was elected president with solid, established majorities in both houses, only to taking a beating the next two years on Capitol Hill when it turned out that the very established congressional leaders were in no mind to take marching orders from Mr. Carter’s inexperienced (at the national level) team. Something to keep in mind.
I could go on, but I won’t. The first investment point is that we are still living in a time of considerable uncertainty, and nobody yet has repealed the business cycle. There are no magic levers to pull, be it Mr. Trump or Ms. Clinton (or Mr. Sanders, for that matter). The second point is that this is not 1980, and Mr. Trump is not Ronald Reagan. The hopeful comparisons are flying, but not even Reagan could be Reagan today. President Reagan inherited a recession, tax rates that were nearly double those of today, and the massive demographic wave of the Baby Boom (there are other important considerations, but those will suffice for now). Deficits soared, yes, but there was plenty of room to restart the economy – and do so with a vengeance, given that there was almost nowhere to go but up. Interest rates had virtually nowhere to go but down – exactly the opposite of today. In fact, the economy languished in a double-dip recession for Mr. Reagan’s first eighteen months until the Fed began lowering rates in August 1982. I don’t think the Fed will be lowering rates much soon, never mind that is has almost no room to do so. Oh, and the manufacturing sector was nearly three times its current size.
In the near term, a lot of profits have been taken in the last couple of days as early traders sell out to the late-arriving crew. Investment notes are circulating that recent moves are way overdone. Meantime the annual end-of-year holiday rally is only a few weeks away, but that rally usually gets some lift from reversing a pullback, and while we may be due for one, there is too much in the way of potential policy surprises for me to feel strong conviction about a move in either direction. Stocks are currently overbought, but not hugely so, while bonds are definitely and hugely oversold.
Don’t take last week’s market reaction as a guidepost. Equities had a top-to-bottom tantrum fall of about 8% in the days following Mr. Obama’s reelection, and that proved to be a marvelous time to buy. They also closed higher the week of the Lehman bankruptcy – oops. Veteran athletes often talk about the importance of letting the game come to you. I suspect that this is an excellent time to practice this dictum. Caveat emptor!
The Economic Beat
On the economic front, the news was nearly as quiet last week as the markets were loud. The report of the week – and it was barely noticed, given that it fell on election day – was the labor turnover, or JOLTS report for September. While “the number of job openings was little changed” (a phrase that begins nearly every report), the hiring trend has been softening the last couple of months. The number of job openings were up slightly on the month, and are up about 2.35% year-on-year (seasonally adjusted), but hires were down on the month and are down year-on-year. The change is quite modest, a bit less than 1% y/y, but does fit in with the overall slowdown in jobs growth. Anecdotally, I hear more and more stories from frustrated recruiters about an interminable hiring process going on ever and ever longer. The openings may be there, but there doesn’t seem to be any hurry to fill them.
A somewhat better-looking report came from wholesale sales data for September. After 19 consecutive months of year-on-year declines in the seasonally adjusted data, sales have now risen two months in a row. The increases are slight, a half-percent or less, but better than negative. The trailing-twelve-month rate in unadjusted data is still down, but moderated to (-2.1%). The level of inventories is down slightly from a year-ago, leaving the inventory-sales ratio at a still-elevated 1.28 (1.33 unadjusted), down a tiny fraction from a year ago. For reasons of its own, Econoday tried to portray the ratio as “constructive and lean,” but the ratio is very far above the average for this time of year. The only times it has been higher in September since 1992 are 1) last year, by a tiny amount; and 2) the last two recessions.
The Fed’s Labor Market conditions index was slightly positive at 0.7 (zero is neutral) in October and the previous month was revised to (-0.1). The index has spent most of the year in negative territory and oddly enough, seems to be improving back to neutral even as the pace of job growth slows. Weekly claims remain subdued, and chain-store sales are still weak. And though I rarely talk about consumer sentiment measures, as they are rear-view and too dependent on stock market headlines, I would note that the latest University of Michigan measure rose to a well-above average 91.6 from 87.2 – and that the survey was compiled pre-election. Where was the angst?
Next month sees quite a pickup, beginning with retail sales on Tuesday. After the Fed meeting and jobs report, retail sales are the biggest monthly market-mover. Consensus is for a gain of 0.6%, driven by auto sales, with a more-modest gain of 0.3% expected for the so-called “core” rate. Also slated for release Tuesday morning are the New York Fed manufacturing survey and monthly details of import and export prices.
Wednesday continues a heavy schedule with reports on October industrial production, producer prices and the homebuilder sentiment index. Thursday has the consumer price index (CPI), the Philadelphia manufacturing survey and housing starts, all for October. Friday will finish up with two little-followed reports, leading indicators and the Kansas City manufacturing survey. The real news will be about what Mr. Trump might reveal about his staffing and plans.