by Chaim Siegel of Elazar Advisors, LLC
Survival Guide To US Politics 2017
The media has President Trump in the corner, body blow after body blow. He’s getting beat up. We’d expect the rest of the year to be more of the same.
It could also get worse. Still, even with the uncertainty this could bring to the markets, investors have a chance to do well this year. We’ll explain.
Equity Markets During Clinton And Nixon
As soon as we hear impeachment, heads swivel to the Clinton and Nixon sagas.
Most of the news about President Bill Clinton’s scandals broke in 1998. It just so happens that 1998 also had one of the worst stock bear markets in our recent history. That crash however was blamed on both global markets, including Russia and South America, along with a slowing domestic economy.
During October 1973, President Richard Nixon carried out the famous “Saturday Night Massacre” when he fired a special prosecutor (sound familiar?) who was looking into the events surrounding a break-in at the Democratic National Committee's Watergate headquarters. President Nixon resigned from his position in August 1974. The Dow plunged from about 5000 to about 3000 during that time.
In the Nixon era too, most of the blame for the crash was directed at economics rather than politics. In that period Nixon ended the gold standard, gold’s convertibility to dollars, which hit the dollar. The oil crisis also spiked inflation during that time.
While both crashes—in 1974 and in 1998—weren’t blamed directly on impeachment procedures or politics, they did happen coincidentally.
Markets will probably associate political risk with downward momentum, which can cause volatility for us.
Is Trump Good For Markets Or Not?
Remember that ahead of the November elections analysts were expecting a market crash on a Trump win.
Yesterday, former CEO of GE, Jack Welch told CNBC that an impeachment proceeding would “blow the market away.”
So which is it? Is Trump good for markets or not?
Markets will certainly react to news. It was surprising the markets didn’t react until yesterday, since we've been hearing so much news about Russian connections for months now.
Investors likely aren’t panicking on the news but rather using the news as a mechanism for typical profit taking.
Unless we were to see economic statistics like GDP and jobs or earnings fall off a cliff, the market has strong underlying fundamentals.
Investors can use these not-so-panicky dips to build positions.
Underlying Market Fundamentals Solid
Factset reported that earnings were up 13.6% in Q1, the strongest in six years.
Jobs have been pushing the economy up and May jobless claims appear stronger than April's numbers.
For GDP, The Atlanta Fed, is expecting a pick-up from Q1’s .7% to 4.1% in Q2.
Again, if these core market fundamental indicators were shaky, we'd need to worry about pile-on risk from politics. Since they're not, we can use political scare-days as buying opportunities.
Dollar Risk
While markets may not be as tied to politics, the dollar can be. We do expect politics to have a greater impact on the dollar.
We drew a few lines on the dollar chart above. We think the dollar had a failure at 99 and has downside to about 92.5. If it holds below there it has downside to about 88.5 (the lower line).
Holding below that and it’s “look out.” Right now, all these lines are in play.
The dollar has been seen as a safe haven globally. As foreign markets see economic strength and opportunity, their outperformance so far this year could build with additional US political woes. That could cause further dollar weakness.
Managing Yesterday's 373 Point Drop In The Dow
Major market indices, including the Dow, Russell 2000 and NASDAQ, all took a nice hit yesterday. How do you respond? There are two scenarios.
Nobody really knows what happens in the future and anything is always possible. But to plan strategically and have a game plan is what's key.
- a. If you're fully invested and can't stand the pain of a day like yesterday then your risk is too big. It makes sense to gradually reduce to a comfortable level.
- b. If you believe you're under-invested, days like yesterday are your portfolio building days.
In no case should anyone try to be a hero and build or cut in big swathes. Gradual adjustments make for cool heads and allow for incremental assessment of the building fundamental, technical and political dynamics. Preparing a game plan in advance of volatile times can help investors stay focused by subduing emotional volatility in rocky markets, avoid chop and stay profitable.
Conclusion
We are probably far from the end of political chaos this year. Yes, it can cause some volatility. As long as our three main fundamental indicators, earnings, jobs and GDP, are moving up, we’d use volatility as buying opportunities. The next terrible news we hear could also be the opportunity to catch this bull market.
Disclaimer: Securities reported by Elazar Advisors, LLC are guided by our daily, weekly and monthly methodologies. We have a daily overlay which changes more frequently which is reported to our premium members and could differ from the above report.
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