Expecting the market to ‘make sense’ is foolish. It does what it wants, when it wants. It has no concern for your views. Often, hindsight proves the market to be exceptionally wise. But there are times when hindsight reveals it to be profoundly stupid.
When Trump won the election, many thought the market would tank. Or, at best, it would barely keep its head above water. But here we are, more than 12 months into Trump’s Presidency, and the market is a strong as a proverbial ox.
It’s faltered lately, but so far, we’ve seen nothing more than a fairly standard correction after an increasingly euphoric bull run. But judging by the chart of the S&P 500 below, I can’t see US stocks breaking out to new highs again anytime soon, either.
While the market has been working its way higher since the sharp sell-off in February, it just doesn’t strike me as one that will resume its bullish advance. I think there is a greater likelihood of a sideways moving market for months to come. After such a strong run from the lows of early 2016, it feels like the market needs to consolidate those gains for much longer than two months.
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We’ll get a better idea of the near term market direction following the US Federal Reserve’s meeting this week. Obviously, investors will want to get a sense of how many more interest rate rises to expect this year. (This week’s expected rate rise is pretty much a forgone conclusion.)
The Fed meets over two days, on March 20 and 21. It will be new governor Jerome Powell’s first press conference. This being the case, my guess is that he’ll try not to say anything that will make the market nervous. That means no change to the pace of interest rate rises this year. Not right now, anyway.
Don’t listen to me though. Instead, watch the reaction of the US dollar after the Fed’s meeting. The foreign exchange (FX) market is pretty good at interpreting ‘Fedspeak’, even when the boss might not say anything.
Right now the US dollar is in a very interesting position
Below you can see a chart of the US dollar index since 2014. Note that it peaked in late 2016, just a few months after Trump’s election win.
While it’s easy to construct stories in hindsight (stories which are often wrong) it looks to me like the FX market saw Trump’s stimulus coming way before he did.
The dollar index started falling in early 2017 and has continued to do so in 2018. Crucially, it broke long term support in January this year and, so far, hasn’t been able to rally back to this area.
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With this in mind it was interesting to hear Trump’s new economic adviser Larry Kudlow, say on CNBC last week that he would ‘buy king dollar and sell gold, that’s the trade that I love’.
When I used to watch business TV more than 10 years ago, I used to think Kudlow was an idiot. I mean that in the way you think anyone is an idiot if they don’t agree with you. But that’s an egotistical view. Kudlow is clearly not an idiot.
But that doesn’t mean I agree with him.
The last time I remember watching him was in the lead up to the Global Financial Crisis. Kudlow was very blasé about the risks that were building in the financial system. He would constantly disparage gold, and had way too much faith in the market to sort things out. He couldn’t see that the market had been badly distorted by Greenspan and then Bernanke’s easy money policies.
So when I hear Kudlow say he’d buy the dollar and sell gold, it’s like a blast from the past. I prick my ears up and think, could this guy be wrong again? Or is he just cheerleading for the administration that he is now a part of?
I mean, Trump’s first budget deficit (the year to 30 September 2017) was US$666 billion. This current fiscal year it will be bigger than that. The US Treasury expects the 2019 fiscal year to come to close to, or exceed, a US$1 trillion deficit, while in 2020 the deficit will likely exceed US$1 trillion again.
All this spending is going on not at a cycle low when government largesse is most needed. No, it’s happening right at the tail end of a historically long expansion.
And Larry Kudlow, a free marketer with supreme faith in markets, wants to buy king dollar? Seriously?
Maybe it’s time to buy gold…more on that tomorrow.
Editor, Crisis & Opportunity