President Barack Obama generally gets credit for calling the stock market bottom in March 2009. President Donald Trump just made a call that stocks will keep rising, but could that mark the Trump stock market top?
"For all of you that have made a fortune in the markets, or seen your 401k's rise beyond your wildest expectations, more good news is coming!" Trump tweeted on Thursday.
When optimism runs too high, the stock market is often due for a fall. An excess of bullishness helped trip up stocks in January, and bullish sentiment is now flashing a caution sign, IBD's The Big Picture column explained on Wednesday.
Trump's tweet, by itself, isn't worrisome, but there are signs that Wall Street's exuberance isn't all that rational. Here's the biggest puzzle: The S&P 500 index and other major averages have been on a tear despite Wall Street's growing conviction that the Fed will hike rates twice more in 2018 and Trump will escalate his China trade war next month.
Financial markets are now pricing in more than 70% odds of a rate hike in December, on top of September's all-but-certain hike.
Something doesn't add up. Markets are way too complacent about China trade-war escalation, or investors are too confident the Fed will plow ahead with monetary tightening. But if Trump does slap tariffs on an extra $200 billion in Chinese imports and the Fed hikes rates in December anyway — the stock market could face a bout of selling.
The Dow Jones and S&P 500 index retreated Thursday, with losses picking up amid reports that Trump could impose the tariffs vs. an extra $200 billion in China imports as early as next week. The Nasdaq composite, which had hit a record high intraday, abruptly turned lower. Emerging-market jitters continued, with the Argentina peso and Brazil real among the big currency losers vs. the dollar.
Trump Nafta Deal Cheered
While Wall Street rallied this week on trade optimism over the Trump deal with Mexico, investors overlooked that the Trump Nafta deal makes a China trade-war escalation even likelier. It also could create more trade friction with Japan, South Korea and the European Union. The Trump Nafta deal, which is expected to raise the cost of cars built in North America, doesn't make any sense unless Trump plans to slap auto tariffs or quotas on autos and parts built outside the North American trading bloc.
Beyond Trump's coming decision over whether to escalate his China trade war, there are a whole host of concerns that should give investors pause.
Economic Growth Peak?
From a macro standpoint, things couldn't get much better for the U.S. economy — and they won't. It's nearly the opposite scenario from March 2009, when the Great Recession was coming toward a close. By contrast, growth peaked in the second quarter and will slow from here, first gradually, then fairly abruptly, as the fiscal stimulus of tax cuts and spending hikes fades. At that point, the economy will be held back by slow labor-force growth and a fiscal stance that can only get tighter as trillion-dollar deficits return.
Fed policy also threatens to exacerbate the coming growth slowdown. There is no shortage of theories as to why the Treasury yield curve has flattened so much. Yet the narrowing yield gap between the two-year and 10-year Treasury arguably reflects investors curbing their expectations about the durability of the Trump economic boom.
The acceleration in U.S. growth has powered the global economy, but the combination of a tighter Fed, higher dollar, and Trump tariffs are beginning to pull in the other direction.
Politics also creates risk for financial markets. When Trump argued last week that his impeachment would reverse stock market gains, most commentators and analysts largely dismissed the idea. But there's good reason to think Trump is right. Of course, it would take a Senate conviction to remove Trump from office. Nothing that has emerged from Special Counsel Robert Mueller's Russia probe makes that a real possibility.
But if it happened, Trump's exit could destroy the current Republican Party, depressing his base so much that Democrats could substantially reverse his corporate tax cuts. Ebullient CEOs would turn cautious, exacerbating the coming slowdown ahead.
Compared with that threat, a Democratic takeover of the House in November looks like a modest potential issue for markets. But it could dampen sentiment as a possible precursor to a Democrat winning the White House in 2020.
Trump Stock Market Risks
The list of stock market risks is piling up, says David Bianco, chief investment officer for the Americas at DWS, who sees an S&P 500 pullback of 5% to 9%, or worse, coming this fall:
"The U.S. dollar is up 7% since April. An emerging-market slowdown aggravated by U.S. tariffs ... already contributed to a bear market in China and a Turkish lira crash. Dollar upside risk remains as the U.S. Federal Reserve intends to hike despite risks abroad, including a contentious Brazilian presidential election, Italian budget (and) Brexit planning. The U.S. midterm elections have tossup odds for the House threatening more inquiries for the president. (Excluding tech) stocks, the S&P 500's median stock price-to-earnings ratio is highest in the last three decades except for the late 1990s, which makes the S&P more susceptible to any domestic or international negative developments."
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