When Will the Trump Rally End?

Despite external concerns around the world over a slowing Chinese economy and the uncertainty surrounding the Brexit negotiations, US markets have surged nearly 10% since the election.

The strong run in US stocks has some financial pundits calling an imminent end to the rally.

Some pundits are predicting the Trump rally will end after inauguration.

They anticipate a bull market selloff on concerns the Trump administration won’t be able to deliver on its promises.

Other experts suggest stock valuations are sky high. That the market has come too far too fast since Trump’s surprise election victory.

Still others cite concerns over rates. The low rates, which fuelled the boom in stocks, are coming to an end. They see a hotter economy bringing higher rates, which will stop the run in US equities.

With all the focus on the new president, maybe we are ignoring a whole lot of data coming out suggesting that the world’s largest economy is powering along.

First, company earnings. They finished strong the prior quarter, and indictations are this earnings season will be even better. Those results have nothing to do with the new president.

Then take the latest report from the Bureau of Labor Statistics. That shows the US labour market ended 2016 strongly. Payrolls increased 156,000 in December. That follows a 204,000 rise in November.

The report shows unemployment continues to hold steady below 5%, but for me the big news in the report was the strong rise in wage growth.

Average hourly earnings are really starting to heat up. The year over year gain came in at 2.9%. That’s the highest rise in US wages since June 2009. See for yourself:

Source: Bloomberg
Click to enlarge

And as US workers start to get more money in their pockets, guess what that will do for real estate prices and rents.

Rather than equities, its US real estate you need to follow, if you’re looking for clues on where the US economy sits right now.

One of the concerns for the US doomsayers is the prospect of rising interest rates. They argue that low rates have fuelled the bubble in stocks and real estate, and as rates start to rise we will see a collapse in both.

It’s no more ‘will they or won’t they’ with the Fed. It’s almost a given that the Fed will begin a phase of rate tightening in 2017. Will this spark the collapse?

First to stocks; in the past rate tightening has not led to a market collapse at this stage in the real estate cycle. Yes there might be an initial reaction, a mild selloff on a Fed rate rise, but markets are unlikely to collapse. Remember, the Fed will only raise rates on a strengthening US economy, and they are always behind the ball on this.

If we can take a step back and look at where the US economy was eight years ago, shedding millions of jobs, unemployment heading for 10%, the US was really in trouble.

Now the unemployment rate is steady under 5%, the economy has had 75 months of continuous job growth, and added almost 15 million jobs. US wages are rising, corporate earnings are growing. At the very least you have to say the US economy is holding steady, and none of that data has anything to do with the new president.

As for real estate, rising rates potentially making it more difficult for homebuyers, but I’m expecting looser lending standards in 2017 will keep the real estate cycle ticking along.

During the presidential campaign, Trump made no secret of the fact that he would dismantle the restrictions put in place on the banks so that 2008 could never happen again.

You can see where all this is heading; another massive real estate cycle continues to build.

It’s as if we have developed amnesia about the causes of the global financial crisis, and are set to recreate the very conditions that led to it.

Another factor which has powered and will continue to power the US economy is housing construction, and there’s a big fundamental driver behind that.

Here come the Millennials

According to research by leading US real estate data provider Zillow, the average age of a first home buyer is 33.

The peak in US birth rates of the millennial generation was in the birth year of 1990.

Sometimes referred to as the ‘echo boomers,’ because these are the sons and daughters of the baby boomers, there are over 80 million of them in the US, and they will have a big impact on the American economy in the coming years.

The peak in this generation are now turning 27 years of age and coming into the ideal time frame for first home buyers.

We are approaching the crest of a peak in demand for new housing as this wave approaches 33 years of age.

There are broader fundamentals in play, which suggest the US economy will continue to hold steady going forward. That’s getting lost in all the focus on Trump.

The financial ‘experts’ are losing the bigger picture.

I’ve ceased to follow ‘expert analyses’ long ago — ever since I could read a chart, really. I found trading expert analysis whittled away the trading account to nothing.

Rather than trade what may or may not happen under a Trump presidency, just trade the chart in front of you.

All the major US indices are trading around all time new highs. The trend in the charts is most definitely up. The financial experts who are bearish on the US are trying to second guess the market, pick a top and that will do horrible things to your trading account, if you try and trade it.

Ignore the expert warnings. If you want to know when the Trump rally is over, rather than consult some expert’s opinion, have a look at the S&P 500 or the Dow Jones index.

Yes US stocks must eventually come down and make a retracement from their strong run up, but look for where the eventual low comes in. If it’s a higher low, then that tells you what you need to know about the US economy going forward.

Until the major US indices start breaking significant monthly lows from prior years, the trend for the US economy is up. Rather than listen to experts, let the market tell you when the Trump rally is over.

As we progress through 2017, keep three things in mind in regard to the US economy: higher wages, looser credit, and increased demand from home buyers.

They don’t suggest a collapse.

At Cycles, Trends and Forecasts, we are seeing the real estate cycle unfold before our eyes, just as forecasted by our real estate clock. If you want to know how to profit from this cycle and time it all to your advantage, go here.


Terence Duffy,
Lead Researcher, Cycles, Trends & Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.

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