What a difference one quarter can make in the stock market. Here we are in mid-March and stocks are back to almost where they were at the beginning of October. The trends have been supporting the bull’s case and investors seem happy to buy stocks.
Readers should realize by now that there are two “puts” supporting this market. A “put,” in financial jargon, is an option that protects you and your investments from catastrophic losses. That’s not to say you can expect no downside, but at some point, the put will come into play and support the markets.
Back in 2008-2009, the Fed’s massive monetary stimulus program characterized by record low interest rates and massive purchases of bonds, was seen as such a put. Two years ago, the Fed began to remove that support by raising interest rates and selling some of those bonds they had purchased over the years.
The markets did not take kindly to that exercise, nor did the president. After a near 20% decline in equity prices last quarter, the Fed did an about face and re-instated that put by once again easing monetary policy. As a result, the markets also did an about face starting the day after Christmas.
Donald Trump represents the second put working in your favor. Although he has never publicly stated it, the president regards the stock market as his barometer on how well or poorly he is running the country. Polls, he believes, are suspect and should be ignored (unless they happen to be in his favor). He reasons it is much harder to manipulate the stock market than it is to manipulate a poll, and he is right.
Last quarter’s decline, he said, was simply a “glitch.” At the same time, he was also doing his utmost to put pressure on Fed Chairman Jerome Powell to reinstate that Fed put. The president even threatened his appointee with dismissal. While pundits discounted those threats as unrealistic, while the Fed stated publicly that they were an independent body and would never bow to political pressure from anyone, in the end, they did just what Trump demanded. You can see clearly the “Trump put” at work.
Next, let’s look at Trump’s handling of his self-initiated global trade war. Over the last two years, he has threatened just about every nation with several kinds of tariffs or other retaliatory measures, unless they agreed to a new trade dynamic that better served the American people. As we all know, China is the country that he has targeted most, and world markets are waiting on the outcome.
The impact of this tariff threat, which is entering its second year, has hampered trade throughout the global economy from China to Chile and everywhere in-between. As economic growth continues to slow, central bank after central bank have done an about-face on any plans to tighten their monetary policy. Instead, one after the other are following the U.S.’s lead and re-instating their own puts on their nation’s stock and bond markets.
Notice, too, that every time the stock market appears ready to falter, the president manages to say something encouraging about trade negotiations with China or some other country. Only last night, he predicted that there will be some resolution to the China/U.S. talks within 2-3 weeks. The Chinese (quick leaners to a fault), are now mimicking Trump’s tactics and “talking up” their own markets in the same fashion.
As it stands today, the stock market has chalked up eleven out of twelve weekly gains so far this year. That’s a pretty good track record for a market that so many investors believed was doomed to failure just a few months ago. We are about 4% away from the S&P 500 Index’s all-time highs. Sure, I can still see the possibility (if not the probability) of a pullback or two in the weeks to come. That’s simply part of being invested in equities. But as I have said over and over again, it is not time to sell. Stay invested and count on the market’s two puts to see you through to the old highs.