Election Special: It's the hard place


We wake up this morning to a new world. We avoided the rocks (a continuation of the present ineffective policy mix), but now have the hard place: President Trump. Although we see further downside for reasons beyond this election (see "Between a rock and a hard place"), the overdue correction we now find ourselves in is ultimately buyable. Here's our road map for the weeks ahead:

  • Uncertainty reigns, initially Trump is such an unknown, non-establishment force that markets will struggle to understand future policy direction from Washington. Worries are high that he will mount a trade war with our major trading partners, a real ding to near-term growth. Markets also will fret about future Federal Reserve policy, both the near-term hike policymakers might still do in December, and more importantly the more hawkish Fed chair Trump ultimately will appoint in 2018 (or earlier if Janet Yellen resigns).
  • When it rains, it pours Even while markets focus on near-term policy uncertainty, the other near-term negatives we noted previously (Brexit negotiations, China growth, anemic U.S. growth, oil price uncertainty along with a big OPEC meeting this month, the December Italian referendum, corporate credit and U.S. earnings downgrades for 2017) are unfortunately timed to heat up over the next few weeks. Bad combination.
  • The future brightens We see this correction as ultimately buyable, just not quite yet. As we advance into the first quarter, Trump's economic team will begin to coalesce, and his market-positive agenda will begin to emerge. And with a Republican Congress behind him, the potential for many of these policies to become law is high. Among likely positive, pro-growth programs we envision are: corporate tax cuts (permanent, not temporary, and therefore more likely to affect investment behavior); heavy infrastructure and military spending; a serious effort to scale back the army of Obama-era regulators that are choking the economy; and a more hawkish Fed that will restore some interest-rate earnings power to savers and to our financial institutions. All of this should help revive growth in the U.S. and raise investor optimism.

We are holding our equity weighting in our stock-bond models at 50%, a modest underweight. However, for the first time in several months, we can safely say that our next move likely will be to raise that weighting. It is a matter of time and price. That's all. 

In the meantime, the market got the hard place it was hoping to avoid. As we say in the gym, "no pain, no gain." The hard place it is! Taking a longer-term view, it's probably better than the rocks. Trust me.