Is the Trump rally credible and sustainable?

Is the Trump rally credible and sustainable?

Only 2 sectors up, bonds on big loss

By Thomas K. Brueckner

Are you becoming convinced that the upcoming implementation of President-elect Trump’s economic plan will guarantee the continuation of our nearly 8-year-old bull market in stocks?

If so, there are some significant details that may have eluded you as you plan on an impervious market in 2017.

First, while the broader index is now up 4.7 percent since the election, only two sectors within the S&P 500 are up substantially: financials and energy, at 14 and 7 percent, respectively.

All other sectors are either flat or slightly negative. So while a 4.7 percent gain in less than 40 days seems impressive, it has so far taken place in only two areas of the economy while all others are unimpressed, languishing in economic malaise rather than euphoria.

Secondly, according to Bloomberg, the record rout in bonds that has eviscerated a staggering $1.7 trillion from the global index’s value through mid December is nearly three times greater than the gain in world equity markets’ capitalization, which rose by a more modest $635 billion.

Yes, bonds have lost more than 2 1/2 times as much as stocks have gained in the aftermath of Trump’s election worldwide. This means that a lot of investors opened their month-end statements for November and saw losses overall, as their bond and blended funds lost far more than their growth funds gained.

Thirdly, the last 50 days have seen geopolitical crises rekindle, as several key European countries are flexing their independence in ways that could have dire consequences for currency and equity markets in 2017.

The constitutional referendum in Italy on Dec. 4 was a resounding defeat for President Matteo Renzi, who promptly resigned the next day, making new elections the next dangerous step on the road to a probable “Italeave,” their own Brexit-like departure from the Eurozone.

Unlike Britain, Italy shares the euro currency, and its exit would demand a return to the Lira, its previous domestic currency. Many analysts now believe such a divorce is the only way to rescue Italy’s ailing banks in the face of Brussels’ unwillingness to provide bailout funds. Italy’s oldest bank, the 544-year-old Monte dei Paschi di Siena, is nearing collapse at this writing, with shares that have lost 97 percent of their former value.

Overall, Italian banks still hold more than €390 billion in non-performing loans, nearly a third of those of the entire 17-nation union, and an amount equal to one-fifth of Italy’s entire GDP as a nation.

In light of these and other issues, the “Trump rally” appears to some as a premature 40-day bubble, atop an unjustifiable three-year bubble, the latter built on stock buy-backs and an enabling Federal Reserve, and the former built on irrational exuberance over a man who has yet to sign his first tax cut.

Famed market guru and prognosticator John Hussman, who called the last two major declines weeks before they began and almost to the percentage point, is still calling for a 40-55 percent decline of the S&P500 “during the completion of this market cycle…”

Jeffrey Gundlach and Bill Gross agree, and David Stockman, President Reagan’s former budget director, thinks the idea of a Reagan-like boom is a fantasy. As he recently told CNBC, “I see a recession coming down the pike in 2017. The stock market is going to go down and it’s going to stay down long and hard because, for the first time in 25 years, there’s nothing to bail it out…”

Stockman continued, “…My call stands. Sell the stocks, sell the bonds, get out of the casino. Bonds have already cratered by nearly $2 trillion worldwide and have miles to go. This isn’t a rotation into stocks, either. It’s the greatest sucker’s rally ever.”

Strong words, to be sure, spoken with as much conviction as the Dow has had in approaching 20,000.
As the year-end investor surveys continue to trickle in, institutional and private endowments, pension-fund managers and independent investment advisors clearly differ from naysayers like Stockman and the realists like Hussman, Gundlach, and Gross.

When asked where they expect the S&P 500 to end 2017, the average answer was up an additional 17 percent.
All you need to decide is whether to follow the crowd, follow the skeptics, or follow your instincts.

Happy New Year.

Thomas K. Brueckner, CLTC, is President/CEO of Strategic Asset Conservation in Scottsdale, a conservative wealth management firm. Reach him at www.go2knight.com.