Last week brought “good” news, at least as far as markets are concerned, and poor performance. This is telling.
By David Ader
I have been recommending a defensive stance in equities since at least February, and truth be told, that hasn’t worked out so well. The S&P 500 Index has returned 4.3 percent since then, including reinvested dividends. I’m not ready to throw in the towel.
What compels me to keep at it is the behavior of stocks at the close of last week — after the big gain in University of Michigan’s consumer sentiment index, after the European Central Bank sounded a more dovish tone, after U.S. retail sales rebounded with strong upward revisions to past months, and after the ouster/resignation of chief strategist Steve Bannon from the White House.
After all that, you would think stocks would have done something other than close down for the week. Interestingly, the big technical damage came on Thursday despite the White House saying rumors that National Economic Council Director Gary Cohn would soon resign were false. Perhaps that last bit gave stocks a small boost, but they certainly were goosed with the news that Bannon was out. None of that lasted, of course. So here we have two bits of ostensibly “good” news about the Trump administration, at least as far as markets are concerned, and poor price action. This is telling.
Let me explain. Gary Cohn is one of the leaders on Trump’s tax reform, hopes of which are already coming into doubt based on the friction between the White House and, well, everyone else. He’s a business-friendly guy who is also a leading candidate to replace Janet Yellen as Chair of Federal Reserve when her term expires in February.
What I think last week taught, especially in the wake of Bannon’s departure, is that the markets are losing their already diminished optimism for the Trump administration, and that raises bearish risks for risk assets in general. Up to now, people like Cohn and White House Chief of Staff John Kelly have kept hope alive that there were enough adults in the room at the Oval Office. People like Bannon and former communications director Anthony Scaramucci, who was hired and fired within the space of 11 days, were deemed something else.
I’m not saying there haven’t been a lot of antics to concern markets, but I do think that the market have given Trump a pass in the hopes that his fiscal stimulus and tax reform agenda would ultimately win out over the negatives. The exit of Bannon should have offered something about Trump’s inner circle apparently getting it together. It didn’t.
Granted, after a week that saw him forced to shut down his two business councils before all the CEOs involved resigned plays into it. And to equate neo-Nazis, KKK paraders and white supremacists with pretty much anyone is an affront to even those whose overriding agenda is lower taxes. My point is that I think last week marked a turn in the market’s tolerance of the Trump administration. The exit of one of its biggest extremists and the lack of a sigh of relief reveals that.
A sideshow to this big show — the circus reference is deliberate –- comes in the form of relatively poor seasonals for stocks, which is a technical matter having nothing to do with Trump. A second sideshow is the behavior of Bitcoin.
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I’ll admit that as much as I try to understand Bitcoin, I still don’t get it. It still seems to be to be a vehicle for drug dealers to transfer money and others to avoid taxes and scrutiny and I don’t get the mathematical creation. What I can understand, however, are charts, and if anything looks like a late cycle bubble, it’s this one. It seems hard to believe, but Bitcoin now has a $69.7 billion market value. I’ve overlaid Bitcoin with the Nasdaq Telecom Index going back to 2000 for a curious comparison.