Disclaimer: I’m a market and technical analyst and not a political analyst. However, given how poorly political analysts have faired in 2016, most notably getting both Brexit and the US election completely wrong, I’ll give you my perspective on the US election, especially as it pertains to markets and the macro environment.
And before I get any political hate from one side or the other: The lens through which I approach this subject is purely macro and structurally oriented. Tensions have been particularly high during this historic election cycle and continue to be high. The country appears hopelessly divided and public face saving exercises by both sides to now try to mend fences can’t hide this fact.
Let’s begin with an old joke that now seems very relevant:
“Two hunters come across a giant grizzly bear in the woods. One of the hunters immediately sits down and starts changing his shoes from big hiking boots to his tennis shoes. His buddy finds this behavior odd and says: “Don’t be silly, you can’t outrun a grizzly with tennis shoes.” His hunting buddy replies: “I know, but I don’t need to outrun the grizzly. I just need to be able to outrun you”.
And right here is the root of one of America’s dirty little secrets. You don’t need to win the support of the American people to become president. You don’t even need to be liked, in fact you can be as highly disliked as Donald Trump is. You don’t even need to get more votes than the other candidate as now both the 2000 and 2016 elections have proven. You just need to get the right votes in certain places.
Consider the following set of statistics:
Let’s be clear what this really means.
Firstly, American voter participation has always been low compared to other major democracies in the world. This long term trend is indicative of two structural problems: 1. A lot of people simply don’t care 2. Many people feel completely disenfranchised. The political system is not working for them. Both parties continue to fail them and they don’t feel they have a viable alternative.
This election in particular was dismaying and turned many voters off as participation rates hit 20 year lows:
What these numbers highlight is this: Presidents are generally elected despite 66-75% of Americans NOT voting for them.
So for all the noise, hoopla and marketing proclamations the ugly truth is this: Neither political party, whether Democrat or Republican, need to win the support of the American public at large to win elections. They only need to beat the other guy. The one without tennis shoes.
And given how poorly the larger system has worked for a shrinking middle class elections tend to not focus on detailed policy performances. Otherwise both parties would look extremely guilty of having done a poor job for the American people.
So it comes down to election strategy and on this point Hillary Clinton lost the election more than Donald Trump has won it. He was never going to beat her on experience as he had never run anything other than his own business. So he needed to make it about personality. Hillary Clinton took the bait and spent weeks telling America what a horrible person he is. Well 58% of Americans already agreed with her on that, so she was preaching to an already convinced choir.
As an already unpopular candidate herself she wasn’t convincing new voters. Rather the resulting mud fest contributed to people tuning out and putting both unpopular candidates on equal footing. As the old saying goes, if you wrestle with a pig you both get dirty and the pig likes it.
I’ll leave it to your political persuasion to determine who the pig was in this analogy, but, at the end of the day, it doesn’t matter, we know who won.
More relevant for market followers is was what happened after Trump’s sudden victory: Candidate Trump went missing and hasn’t been found since.
A soothing acceptance speech combined with an after-election party of apparent reality moving impact prompted many Wall Street banks to suddenly celebrate a newly found optimism and even well known bears such as Stan Druckenmiller and Carl Icahn reversed course in an instant. Carl Icahn notably raced from the party and placed $1B worth of long trades in the middle of the night. As any 80 year old would do of course.
“Icahn, 80, left President-elect Trump’s victory party in the early hours of the morning to bet about $1 billion on U.S. equities, he said Wednesday in a telephone interview on Bloomberg TV.
“I would have tried to put a lot more to work, but I couldn’t put more than about $1 billion to work, and then the market got away.”
What followed was a panic sector rotation for the ages. Up was down, down was up and we witnessed $DJIA futures transverse 4 months of price discovery in a mere 36 hours with financials & defense & industrial stocks screaming higher and bonds selling off with yields rising steeply. All of a sudden coming inflation was the talk of the town which is now a good thing “they” say.
In short: The anti-establishment candidate became the establishment president overnight.
With a surprise Republican majority in both House and Senate lower taxes and increased deficit spending became the primary theme of stock market nirvana. In this new universe, the candidate Trump that the Republican party could not control and didn’t support during the election, all of a sudden morphed into president-elect Trump who would do the Republican party’s bidding.
Not so fast I say.
In context of now suddenly rising yields consider what candidate Trump said in May:
“We’re paying a very low interest rate,” he said. “What happens if that interest rate goes two, three, four points up? We don’t have a country. I mean, if you look at the numbers, they’re staggering.”
And he’s right. The numbers are indeed staggering. And apparently president-elect Trump wants to increase them as early proposals include big tax cuts with increases in fiscal spending on military, infrastructure, etc. On this narrative the $DJIA broke to new all time human history highs on the notion that rising yields, deregulation and more spending will suddenly grow the economy.
What does candidate Trump think of stocks prices at new highs? We don’t have to guess as he told us in August:
Donald Trump believes it’s time to dump stocks:
“In an interview with Fox Business on Tuesday, Trump was asked if he has money in the market now.
“I did, but I got out,” Trump replied. He warned of “very scary scenarios” ahead for investors. “The only reason the stock market is where it is, is because you get free money,” Trump said.
Trump slammed America’s central bank — the Federal Reserve — for keeping interest rates at extremely low levels.”
So what is reality? Reality is nobody knows what a Trump presidency will ultimately look like, and I suspect not even Donald Trump himself knows.
He’s just beginning to build his team and find his footing. But here’s the thing: Since nobody can possibly know what this presidency will look like this new political reality creates an enormous amount of uncertainty and markets generally do not like uncertainty.
What we witnessed in the past 48 hours are a bunch people making a bunch of assumptions, closing their eyes, and blindly jumping into some stocks and selling other stocks.
Panic rotation I call it. This was the intra-day tape on Thursday:
Yet lost in all the noise is this: Markets actually have been acting very technically.
Consider: A week ago Friday markets were very oversold and the $VIX filled its gap and tagged its upper trend line while the $SPX hit its 200 day moving average. A perfect confluence suggesting a bounce was coming:
But note, the broken trend line from February remains broken and it was rejected on Thursday. And this broken trend line is now confirmed resistance. And it’s steep. Also note the higher lows on the $VIX.
And for all the hoopla about the $RUT’s almost 11% ascent in a week it can’t hide the fact that its 2009 trend line remains broken:
And while the $DJIA made a new all time high it did so on a major negative divergence as internals in the broader market were horrid during the advance last week:
Yet most notably, banks ended up short term historically overbought with many banks showing daily RSI readings in the mid to high 80’s.
A long term chart of the $BKX shows why that is actually not necessarily bullish, at least in the short term:
And therein lies the risk for the market going forward. A closer look at the $SPX futures chart shows something significant having occurred this week: The 2009 support trend line was tested and held.
For now this means the larger market is still safe, but as everyone can see the pattern is tightening and demands a resolution:
Currently the pattern extends into 2230. While we can’t know when the patterns ends we have one certainty: One of these trend lines will be broken by 2017 at the latest. A sustained upside break would yield a potential technical move to a 2275-2354 range on the $SPX futures contract for a final grand finale which perhaps this market still needs. A break lower, however, would yield a technical target range of 1610-1745.
A break lower would hurt a lot of people. But take comfort in the fact that our new president would be fine on a break lower. After all, he “got out”.
One other word of caution: In this world of newly found of bullish optimism one needs to realize that this entire rally has been based on conjecture. A front run, a pricing in of facts that have yet to come to fruition. Not a single thing has actually changed. No laws have been passed, not tax cuts have been issued and millions of voters of the losing party appear somewhat depressed. It seems unlikely that this election result will be confidence inspiring to them and hence one might want to be aware of an issue I’ve raised before: Most new presidents get a recession in their first term, especially after a two term president concludes office which is the case here.
And despite this big rally last week world markets remain below 2007 highs with a broken trend lines to boot:
America remains the most powerful and impactful country of the world. The world has been closely watching this election horror show that I have termed “Rock Bottom” recently.
Yes markets can make new highs and clearly some people are chasing prices and valuations higher. Yet people should not forget that the internals show that others are selling. While Donald Trump has won the election he has not won the mind of the American people nor the world. The world has been watching the recent election with petrified horror and the headlines have not been kind.
In a way this could all work to Donald Trump’s advantage. Eight years ago President Obama came into the White House on a wave of global optimism. He even received the Nobel Peace price before really taking office. Expectations were so high he could only disappoint.
As far as the world is concerned the expectations for a Trump presidency are so low he may well exceed expectations.
However there is an early apparent problem: The people who voted for Donald Trump also have high expectations. And their expectation is that he “drains the swamp” not make Wall Street and the top 1% richer.
But this is all that has been accomplished in these first days following the election.
And perhaps this is America’s real dirty little secret: The establishment always wins no matter who is president.