U.S. equities look worryingly vulnerable, warns Bloomberg's Mark Cudmore, warning that Trump's doubling down on his hardline autocratic approach ensures that markets won’t be able to overlook the implications of his immigration order.
I apologize if this piece seems very similar to three of my last four columns, but markets are exhibiting exceptional complacency... That attitude may shift rapidly.
Today, futures are signaling that the S&P 500 Index may break the post-election upward trend and also fall below the 2017 volume-weighted average price of about 2,273.3. That means that on average, recent buyers are losing money while the technicals suggest holders of stocks that have made money may want to consider taking profit.
Trump’s initial order suddenly suspended the rights of a small minority of permanent residents, which was worrying enough. Firing the acting attorney general for questioning the legality of such a move just hammers home that the rules could change quickly for anyone dealing with the U.S. The established rule of law is now in doubt.
The problem this highlights is that it now becomes a subjective assessment of where this behavior stops. Trump’s willingness to rule by decree, without consulting government departments or stakeholders, means it’s impossible to rule out the prospect that he might seize assets or unexpectedly implement some form of capital controls. That seems drastic and far-fetched, but the actions of the last few days are also extreme, so how do investors know with confidence what the limit will be?
Equity volatility measures are near record lows which indicate that protection is under-owned. Traders have forgotten what a correction can look like and, given the level of hope and optimism out there, panic could spread quickly.
With both global growth and earnings looking positive, and the possibility of pro-growth Trump policies to come, there’s no reason -- yet -- to believe in a sustained bear market for U.S. stocks. However, the potential for a short-term shock appears to be far greater than traders are allowing for.
Notably, much has been made of the surge in macro-economic 'data' post-Trump, but as we noted previously, this stock-market-supportive surge has been driven solely by 'soft' data and not 'hard' actual economic data. What is perhaps more immediately worrying is the seasonal tendency for a post-fiscal-year surge in Economic data followed by a Q1 plunge...
If this happens, then Mark Cudmore's warning will very quickly be proven correct.