Doomsday Dial Back - Trump Trade Refreshed For Now

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Includes: BOND, C, DIA, GLD, IWM, JNK, JPM, OIL, QQQ, SPY, UUP, VGK, VTI, VXX, XLF
by: Markos Kaminis
Summary

The public testimony of Jim Comey was far less worrisome than it could have been, and in my view did not implicate the President in an impeachable offense.

Investors previously worried that the President might have to focus his attention to defending himself legally, and take his eye off his broad economic initiatives and plans, can relax now.

Fear should fade and greed should make its way back in as the Trump trade is refreshed.

But the Fed is still on tap for next week, so while a rally is in store near-term, it will need further confirmation next week to continue.

Investors still have plenty to worry about this summer, from burgeoning compensation inflation to geopolitical issues, so I would not chase stocks too far higher.

The long-awaited testimony of former FBI Director Jim Comey had the attention of the nation Thursday. The stock market was absolutely hinged to it, or so it seems. In actuality, fear and greed are dictating the day, and it's almost a given what comes next for stocks. With the uncertainty cleared, investors can once again bid for equities, and that is exactly what they are doing this morning! The S&P 500 is up 0.4% just after 10:00 AM EDT, I expect stocks to continue higher.

If you read newspapers and financial blogs, Thursday's testimony of Jim Comey was the biggest thing since slice bread. It's true that if he implicated the President in an obstruction of justice claim, due to the President's firing of the FBI Director while asking him to lay off the "Russia thing," markets would see tumult on uncertainty at the top of government.

Investors have bid up stocks since President Trump's election because of a series of actions geared to create American jobs and clear the way for easier economic value creation for corporations. If the focus of the President's attention would need to shift to defending himself, then the pace of positive economic efforts would probably decrease. That requires the market to reconsider values, especially given the current P/E ratio of the S&P 500 is well above its historical average.

Thus, fear on a new revelation from the testimony would have caused stocks (NYSE: VTI) to correct sharply and volatility (NYSE: VXX) would have surged. But that is not what happened, as Comey left the big questions to the congressmen to discuss and to the Special Counsel to the FBI, Robert Mueller, to decide. About the only thing Comey implicated the President in was in trying to get the Director to take it easy on General Michael Flynn. It seemed inappropriate, but as the Director said himself, the work of the FBI will go on with or without Comey.

My feel for this is that because there was no significant scary news flash during the testimony, investor fear will fade. There was a closed-door testimony immediately after the appearance publicly, and something scary might be leaked to the press from that meeting. Still, I believe the market will take its lead now from what it saw, and what it saw does not imply immediate impeachment proceedings.

So, now fear can fade and greed can make its way back into the thinking of investors. There's just one problem, stocks never sold off in earnest. The SPDR S&P 500 (NYSE: SPY) closed the day about where it started it, and that was right near 52-week highs. The same goes for the Dow Jones Average (NYSE: DIA), while on the fringe of risk, the Nasdaq-100 +0.4% (NASDAQ: QQQ) and Russell 2000 +1.4% (NYSE: IWM) moved more significantly higher. The U.S. dollar (NYSE: UUP) solidified on the news and gold (NYSE: GLD) and oil (NYSE: OIL) sold off a bit on that dollar strength.

President Trump is actively trying to reestablish the "Trump trade." He is highlighting infrastructure this week, the rebuilding of America so to speak. And the House of Representatives just passed a bill that aims to retract many of the regulations placed on banks (NYSE: XLF) (NYSE: C); the Senate still has to get its hands on it, but it looks like a clear positive for banks (NYSE: JPM). And I was right about this too, with banks up sharply; the XLF is up 1.4% this morning after marking bigger than market gains yesterday as well.

We still have the Fed (NYSE: BOND) to worry about next week, but the general consensus seems to be that we will get a rate hike combined with dovish speak, easing market concerns about the pace of monetary tightening. And if the Fed continues to talk down inflation expectations (NYSE: JNK), the market will have little to worry about, whether it should or not. It actually has a lot to worry about in terms of inflation (see my write up here) and geopolitical risks (NYSE: VGK), but a short-term rally here to new highs is possible just the same as the Trump trade gets refreshed. I would not chase stocks too much higher though due to my geopolitical concerns, unless we see a simple tax cut pushed through (a significant Trump trade driver), versus the reform plan that Congress needs more time to work through for budgetary reasonableness. Stay tuned to the column for my regular insights on the market, updated for your fast reference premarket and for your weekly planning.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.