Who's to Blame For Bumpy Markets?

Jeff Cox of CNBC reports, Trump's contradictions are swinging the stock market this year:
Looking for a reason why the market's been so bumpy this year? Blame Trump. Looking for a reason why the market has held up so well this year? Blame Trump.

There's been a overriding paradox this year for investors: President Donald Trump has been both a blessing and a curse, goosing stocks through tax cuts and vexing the market with a seemingly endless stream of gut-churning headlines.

"We don't recall a President who has been simultaneously so bullish and bearish for stocks," Ed Yardeni, head of Yardeni Research, told clients in a note earlier this week. "That might explain why the S&P 500 has been zigging and zagging since the start of this year."

Actually, the market's done pretty well for itself lately.

After a wickedly volatile first quarter that saw major averages foray into correction territory, stocks have bounced back nicely. The S&P 500 is now up 4 percent for the year, thanks to a nearly 8 percent jump since early April, and the Dow industrials have posted a 1.8 percent increase.

Tech stocks continue to lead the market, with the Nasdaq surging 12.4 percent.

Yardeni, an economist and market strategist, said actions and policies specific to Trump can be tied to the market's ups and downs. He cited a J.P. Morgan report that looked at market behavior and determined that tariff threats by the administration had held stocks back by 4.5 percent since March, resulting in a $1.25 trillion slice in market cap.

"I guess we can blame Trump for that loss thanks to his protectionist saber-rattling. On the other hand, he deserves credit for enacting a HUGE corporate tax cut at the end of last year," Yardeni wrote.

Republicans pushed the largest tax cut in U.S. history through Congress in December, a $1.5 trillion reduction that Yardeni said lowered taxes by 36 percent for nonfinancial corporations in the first quarter.

"We think the market is telling us that the signal is earnings that have been supercharged by the tax cut, while the noise is protectionist saber-rattling," he added. "That's been great for cyclical and growth stocks."

In fact, Yardeni said the Federal Reserve and its interest rate hikes have rattled the market more than Trump.

The central bank enacted its second interest rate increase of 2018 on Wednesday and indicated that two more quarter-point increases are on the way before the end of the year. In addition, the Fed is tightening monetary policy further through the reduction in bond holdings on its balance sheet.

However, the market looked to be headed for a loss Friday after Trump announced tariffs on Chinese technology imports that would amount to about $50 billion.

Overall, though, Trump has fared better than most of his predecessors at this point in his term.

Earlier this month, he observed his 500th day in office with the best Dow performance of any president since George H.W. Bush in 1989-90, and sixth-best among the 20 presidents since the turn of the 20th century, according to LPL Research.

Investors remain skittish, though, and have pulled $60.3 billion out of funds that focus on U.S. stocks, according to Investment Company Institute data through April.
Love him or hate him, President Trump has been very busy lately warming up to North Korea's leader as he rebuffs his G7 allies and he was back at it on Friday, slapping 25% tariffs on up to $50 billion of Chinese goods.

So what gives? I must admit, people don't understand Trump but as far as I'm concerned, he's as transparent as you can get.

First, he passed the largest tax cut in US history which mostly benefitted large corporations. That's the number one reason why the stock market keeps rising and that's why even though corporate America hates any prospect of a trade war, CEOs are not publicly criticizing Trump's administration.

Second, his protectionist saber-rattling is just feeding his base, working-class Americans who lost or are scared of losing their well-paid manufacturing jobs. We can argue whether these policies are doing more harm than good, but for Trump, it's all about optics and garnering votes.

In early April, I wrote a comment on whether trade wars will crash the market and I said "no". I still think trade wars are being blown way out proportion and while it's possible they escalate and have a material impact on the global economy, I still believe cooler heads will prevail before we reach the point of no return.

However, that's where my good news ends.

The problem right now isn't Trump or trade wars, the problem is the Fed hiking rates and signaling it will continue hiking rates.

People get all emotional on Trump but they're missing the bigger picture, the global economy is slowing and there's not a damn thing Trump can do about it. He's running out of fiscal bullets.

Have a look at the chart below, courtesy of Denis Ouellet's Edge and Odds blog, a great blog to track even if I don't agree with all his contrarian calls (click on image):

Denis got this chart from Angel Talavera on Twitter and it basically shows you what I'm worried about, the global economy is slowing with Eurozone leading the way and emerging markets and the US not far behind.

No wonder ECB president Mario Draghi was dovish in his statement this week, walking a very fine line between the end of QE as he tries to manage market expectations:

The euro (FXE) got crushed on Thursday and so did a lot of other currencies as the US dollar (UUP) surged close to 52-week highs:

The greenback's strength was something I predicted last year when everyone was short US dollars but it's getting a bit overdone here and along with Draghi's dovish comments, it's been wreaking havoc on emerging market currencies, stocks (EEM) and bonds (EMB) (click on images):

Now, the carnage in emerging markets isn't pretty and definitely signals a Risk-Off market. And there could be more pain ahead for emerging market stocks (EEM) and bonds (EMB) especially if trade wars escalate (click on images):

Those 5-year weekly charts above make a lot of emerging market bulls very nervous as these charts are definitely not bullish.

But Mehran Nakhjavani, Partner, Emerging Markets at MRB Partners thinks talk of an EM debt crisis is just plain silly:
There is no imminent threat of an EM debt crisis. While EM international bonds outstanding are indeed at historic highs, expressed as a share of GDP, the growth of issuance is primarily from the private sector, the latter dominated by China. For ex-China EM economies, the most recent growth has come from government issuers, with Saudi Arabia, Qatar and the UAE accounting for much of it.

As a general rule, history suggests that debt crises result from a loss of momentum of the denominator of the typical debt ratios. In other words, a deterioration in the overall ability of an economy to sustain debt and its servicing. A growth of the numerator, for example as a result of rising interest rates, is typically not the trigger for crisis, except in extreme cases.

Even if the current synchronized global economic expansion were to slow down, the debt fundamentals of many EM economies are far superior to what prevailed prior to previous EM debt crises. There will be a case to be made for impending crises in some vulnerable EM economies, but absent a 2008-style global credit crunch it is hard to see any meaningful overall threat to EM debt on a 6-12 month investment horizon.
If Mehran is right, the sell-off in emerging market stocks (EEM) and bonds (EMB) is another buying opportunity for long-term investors looking to increase their exposure to emerging markets.

Of course, there are many ways to play emerging markets here like going long the Canadian dollar (FXC) or buying US stocks like Caterpillar (CAT), Deere & Company (DE), Freeport McMoRan (FCX) or just follow Warren Buffett and buy Apple (AAPL).

But China is making people very nervous these days, including the folks at Variant Perception who think it's presenting headwinds to industrial commodities (h/t: Dan Esposito):
Our macro-driven model of expected industrial commodity returns (the CRB Raw Industrials Index includes non-exchange traded commodities such as burlap, rubber and lead scrap) has turned persistently negative, triggering the regime to shift to bearish from neutral (top left chart). This has been driven by tight Chinese liquidity conditions and the peak in global growth. The top-right chart shows that our BCFI Index has peaked and turned down, suggesting headwinds for global growth and commodity prices. Slowing EM real money growth (bottom-left chart) will also be a headwind, as is slower Chinese growth indicated by our leading indicators (bottom right chart).

So far this year, commodity markets have held up very well despite rising real yields and the recent rebound in the US dollar. This is likely reflective of late-cycle inflationary dynamics which tend to help commodities outperform as the economic cycle matures going into recessions. However, given the negative signal given by our forecast model and weak China leading indicators, for investors with industrial commodity exposures, it makes sense to buy puts to hedge against industrial-commodity price falls over the next 6 months (click on image to enlarge).

If you look at China's Large-Cap ETF (FXI), it's sitting on its 50-week moving average (click on image):

The chart isn't telling me to panic just yet, in fact, it could reverse course and head higher but all that remains to be seen.

One thing I can tell you is emerging market currencies getting slaughtered is actually good for many emerging markets relying on exports for growth. The problem, of course, is rising US protectionism can exacerbate this sell-off.

But there's a limit to what Trump and more importantly, the Fed, can do without risking a much bigger surge in the US dollar, sowing the seeds of the next global financial crisis. If Trump keeps laying tariffs and the Fed keeps raising rates, the US dollar will keep surging to new highs and that could unleash unbearable global pain.

Capiche? So take all this talk of trade wars and the Fed hiking rates a couple of more times this year with a grain of salt. If they continue on this trajectory, it's game over and they know it.

This is why I maintain that in the short run, the surge in the US dollar and sell-off in emerging markets is a bit overdone and we might see a relief rally this summer.

Longer term, however, I see a global slowdown ahead which is why I maintain a more cautious stance, especially in Q4 where we will see the creeping effects of the Fed's rate hikes start to bite.

Also, trade tensions are giving a much-needed boost to defensive stocks like Kraft Heinz (KHC), Campbell Soup (CPB)  and other consumer staple stocks (XLP) but if this turns out to a rough and not soft patch, only US long bonds (TLT) will save your portfolio from being clobbered.

One thing I can tell you, it's still a bull market in stocks but you need to pick ‘em well. Have a look at shares of Canada Goose (GOOS) today as it beat on its top and bottom line (click on image):

Its shares have more than tripled over the last year but don't chase this hot stock now (never chase any hot stock or you'll get burned alive!!).

The point I'm trying to make is turn off CNN, FOX, and CNBC, there's a lot of noise out there but in my universe, there are plenty of stocks to trade and some are doing very well (click on image):

So stop blaming Trump for everything, focus here, the market isn't breaking down just yet, there's still plenty of liquidity driving risky shares higher, you just have to pick your spots very carefully and hope the tide doesn't turn anytime soon. And again, don't chase stocks here, any stocks, because you risk being burned!

On that note, enjoy your weekend and please remember to kindly donate to this blog via PayPal on the right-hand side under my picture.

Today, I quietly celebrate my ten-year anniversary. It's been quite a journey and I want to thank those of you who have supported my efforts in every way and helped this blog achieve its success. Writing a daily blog isn't easy, far from it. It takes tremendous discipline, dedication and it's nice to see people appreciate the work that goes into it, so thank you for your support.

I will also ask many of you who regularly read this blog to please donate to the Montreal Neurological Institute here. I was diagnosed with MS exactly 21 years ago and even though it hasn't been easy, I count myself very lucky. The folks at the MNI are doing a great job helping patients with all neurological diseases so please help them any way you can. Thank you.

Below, Paul Tudor Jones, founder of Tudor Investment Corporation and the Robin Hood Foundation, speaks with CNBC's Andrew Ross Sorkin on the market reaction to US talks with North Korea, his forecast for the Federal Reserve and his take on socially responsible investing.

I don't agree with Tudor Jones's forecast on rates but this was an excellent interview, one well worth watching as he discusses many interesting topics and not just markets.

And in an exclusive interview, top-ranked portfolio strategist François Trahan explains the changing market leadership and why it’s predictable. He speaks with Consuelo Mack of WealthTrack. Great interview, I have learned a lot reading François's research at Cornerstone Macro, it's truly fantastic.