Who said financial markets aren’t predictable?
At the start of the year, I warned the stock market would pull back into Trump’s inauguration on 20 January.
The move happened on target. It was a ‘buy the rumour and sell the news’-type trade. Punters became nervous and preferred to sit on the sidelines. Traders wanted to see a smooth inauguration before buying.
Last week, I warned that stocks would probably bounce…perhaps into early February.
The bounce played out on target.
I’m no genius…
See, that’s how markets tend to work.
When traders realise the ‘news’ hasn’t changed, they normally buy the old ‘rumour’ on the pullback. And, while it doesn’t happen all the time, reactionary moves can send markets to fresh highs. It depends on the strength of the rumour.
That’s how it played out this time; perhaps due to the bullish nature of Trump’s economic and infrastructure plans.
The bounce was extraordinary last week. The Dow Jones Industrials Index hit a fresh high of 20,125 points. If you blinked, you probably missed it. The Dow has pulled back slightly since. And while it could re-test the major high one final time, I believe the ‘Trump rally’ is over. For that reason, get ready for a 10–15% stock market correction.
A stock market correction is well overdue, and could start at any moment.
There are two main reasons why a stock market correction looms: Trump and Brexit. Let’s focus on the US president today. I’ll cover Brexit another day.
Winding back the clock, most punters thought stocks would decline on a Trump victory. It made sense. Remember, financial markets normally make volatile moves on unexpected results.
A Trump victory was totally unexpected. The mainstream media painted him as a terrible choice for president — something that hasn’t changed.
The market was expecting Hillary Clinton to win. In fact, Newsweek declared her the winner before the results were out. It printed a ‘Madam President’ publication cover, which is going for over $100 on eBay. If you missed it, take a look for yourself:
[Click to enlarge]
I got $3.50 odds backing Trump to win in March, and $6.00 odds on Election Day. At one stage, Trump was paying $10 to win when Hillary was at $1.01.
Despite those odds — or perhaps because of them — Trump’s victory shouldn’t have been a huge surprise…
Jim Rickards, our in-house geopolitical-investment strategist, warned that Trump could win at the Port Phillip Publishing conference in Port Douglas last October. Jim has a knack for correctly calling big political events. He got the Brexit result right as well. To find out about his next big forecast, click here. It might surprise you.
The silent majority — the anti-establishment vote — is extremely upset. They’re sick and tired of the political corruption, which is why Trump made it into the White House. However, with him being portrayed as a terrible leader by the mainstream, a market shock was expected.
We can’t say we were wrong…
The stock market fell dramatically on his victory. Surprisingly, however, markets bounced back quicker than expected.
The smartest traders connected the dots. Trump announced a US$1 trillion infrastructure program to rebuild the US and ‘make it great again’. That sent commodities — namely copper and iron ore — through the roof.
Trump also announced his plans to cut corporate taxes from 35% to 15%. That’s great news for corporate earnings.
He also wanted to repeal and replace Obamacare, which has doubled healthcare costs for US citizens. Getting rid of it should put more dollars in the average Joe’s pocket, which could be used to stimulate the economy.
Wall Street lapped it up, and stocks surged.
That is, until now…
Why stocks are about to melt down
The Daily Signal reported on 25 January:
‘House Speaker Paul Ryan told House and Senate Republicans that lawmakers likely won’t repeal and replace Obamacare until March or April.
‘Speaking in the first major session of GOP lawmakers’ joint retreat in the City of Brotherly Love, Ryan said Wednesday that the health care law wouldn’t be repealed and subsequently replaced until spring.
‘“What we heard today was Obamacare is front and center,” Rep. Chris Collins, R-N.Y., told reporters, referring to the first session of the retreat, which outlined President Donald Trump’s first 200 days in office, or the “200 Day Plan.”’
That marks delay number one. What about infrastructure?
Politico reported on 29 January:
‘The great bipartisan hope of 2017 — a massive public works initiative that would allow Donald Trump and Democrats to show they’re serious about putting blue-collar workers back to work — may be in trouble before negotiations even begin.
‘Trump will almost certainly need Senate Democrats to get any infrastructure legislation through Congress, and this week they laid out a $1 trillion proposal this week that neatly matches the price tag of Trump’s own plan. But the similarities end there: If anything, Democrats set a mark that will be nearly impossible for the White House to meet.’
Mark down the second delay on your list. In other words, don’t expect any infrastructure spending anytime soon.
Surely the tax cuts are on target?
Reuters reported on 28 January:
‘When it comes to tax reform, senior congressional aides said the spring of 2018 might be a more likely time than this year for the passage of legislation.
‘Republican lawmakers lavished praise on Trump in public. In dozens of interviews, many said they felt he would be an energetic champion of issues they cared about. But some also voiced fears that his big agenda would drive up deficits and said they were still searching for details on his plans.’
That pretty much says it all.
We’re looking at massive delays with three of Trump’s main policies, which isn’t good for financial markets. Remember, stocks surged because of Trump’s policies after the election.
Those policies now appear to be more hopeful than anything…
This is a classic ‘buy on the rumour and sell on the fact’-type play. Don’t be surprised if markets start selling off in the weeks ahead. The policies — while good in theory — have already hit dead ends.
Traders are going to be disappointed soon…
Throw in the Brexit rumours and we’re looking at a 10–15% stock market correction.
The stock market correction should start any day now.
Don’t be worried. Remember, stock market corrections are a healthy part of bull markets. So, if you’re not already part of this bull market, the coming correction should offer a great opportunity to buy stocks cheap.
Look to buy your favourite stocks near the low. I’ll guide you throughout the correction.
The best stocks could offer tremendous rewards this year. I’ve tipped three of these stocks — all still flying below the mainstream radar — to subscribers of my paid investment service, Resource Speculator.
Remember, we’re not looking at a major crash at this stage. The economic environment still looks relatively healthy. So, look to buy your favourite stocks on the cheap. If anything changes, I’ll let you know.
Editor, Markets and Money