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Ladies And Gentlemen, We Have A Black Swan - Version 2.0

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by: Bill Kort
Bill Kort
Long only, blogger, long-term horizon, macro

Late in the evening of November 8, 2016, I wrote a post, "Ladies and Gentlemen we have a Black Swan." The Black Swan (unexpected, very rare) was the surprise election of Donald J. Trump as President of the United States. This was before the final tally of the vote was in. You may read the entire post in the link above. However, to summarize briefly, my belief was that the market would get crushed for a while but it would not be the end of the world. Turned out I was to be proven immediately wrong. I changed my tune as the market began its major post-election rally to new all-time highs ("I need new glasses - That Black Swan Was White!").

Turned out the promise of tax cuts and deregulation trumped (pardon the pun) my concerns about the president:

"My knee-jerk reaction, late election night November 8, 2016, was to assume that a Trump victory would be a bad thing for the market because it would create uncertainty. We did not know which, or how many of the things he had promised, he might actually try to do (i.e. The Wall). Also, Trump the candidate appeared erratic and unpredictable. I believed uncertainty about the candidate would create market weakness. Was I ever Wrong!"

That was then. Black Swan 2.0 is now

Without the promises of new tax cuts or more deregulation and a new Democratic House of Representatives, the market may be back to focusing on the uncertainty that President Trump brings to the table. Friday was a perfect example. After the market had a hissy fit over another quarter point bump in the Fed funds rate with help from some reassuring words from Steve Mnuchin ("Treasury Secretary Mnuchin, says market reaction to rate hike 'is completely overblown"), stocks began to rally. Within an hour, the President announced that he would not sign the continuing resolution (CR) to keep the government up and running until February. Mr. Trump had decided at the 11th hour he just had to have $5 billion for his border wall versus a smaller amount agreed to yesterday... erratic and unpredictable... shave another 2% off the Dow.

With the mounting pressure of divided government and potentially more bad news from the Mueller investigation and other investigations, both federal and local, how will this President react? His trade policy and potential government shutdown would seem to indicate he likes acting against his own best interests - a higher stock market and strong economy. He needs both for reelection.

Predicting is a tough game

That's why I try not to do it. Sometimes I step over the line, as I did in my "Black Swan" commentary. Maybe I was a little early. Maybe it will get worse before it gets better. It may be that the market has already discounted the negative side of the "Trump Effect." The market is very oversold. Bottom line: other than the morass in Washington, the fundamentals are not that bad. We will survive.

What's your take?