United States
Some have disagreed with me but I’ve remained steadfast that the post election stock market rally was mostly due to hopes for tax reform and regulatory relief (the Trump put I’ve heard from some) and the positive impact that would have on earnings. I’ve also repeated, likely to your annoyance, that the elephant in the market room in 2017 is that this will be the first year that all 5 major central banks will in some fashion turn off some of the liquidity lights at this party. Thus, the lack of tax and regulatory reform or a watered down version and the tightening of monetary policy would be the two main risks to stocks. With yesterday being the worst market day since Friday September 9th, 2016 when the S&P 500 fell 2.5%, let’s go back to the reason on that particular day. It was due to tough talk from Eric Rosengren on not letting the economy overheat and thus hinting at a rate hike which didn’t end up happening until December. Non voting member Robert Kaplan that day said pretty much the same and Lael Brainard announced an unexpected speech was going to be given the following Monday and everyone freaked on the thought that it would telegraph an upcoming rate hike. It of course didn’t and we rallied 1.5% that Monday.
The point is, politics and monetary policy have been and will continue to be the main driver of stocks. At least over the past 7 years, mediocre economic activity, anemic revenue growth and low quality earnings didn’t matter, it was all about multiple expansion because of you know what. Trump’s victory added juice of course and we have to ask, now what? You tell me we’ve rallied because of better earnings in Q1? Did you see what stocks did since 2012 when earnings barely grew and in fact fell for 6 straight quarters? We’ve already pulled forward in stock market return the earnings rebound we are now seeing. That’s what happens when valuations get extreme and please don’t just value the market on one year’s forward earnings as your only indicator.
This all said, at least for now the S&P 500 is still in a range of 2325 and 2405 that it’s been in for the past 3 months until proven otherwise but I will add this: While valuations don’t matter until they do, I’ve argued that this year they will begin to matter and they have given us ZERO room for error of any important kind.
What’s the Fed to do if this political drama intensifies? Rate hike odds for June of course have fallen but they should ignore this because taken to its worst conclusion only gives us another President.
Lastly on this, after a nearly 50% one day increase in the VIX yesterday, many should be reminded again that it can stay low (defined as well below its long term average of 20) for a while but when it historically has gotten EXTREMELY low (aka, the lowest since 1993 last week), it has rarely stayed that low for that long.
As for what this all means for the Trump agenda, Reuters ran this story last night: “Republicans worry Trump scandals may doom legislative agenda.” They said, “…four months into Trump’s tenure, only limited progress has been made. The House of Representatives passed a measure to rewrite Obamacare, but the Sentate is only in the very early stages of considering the issue. Lawmakers are just beginning their push on tax reform.” Watch today as the House Ways and Means Committee will hold a hearing on tax reform. “Key administration and congressional leaders met Wednesday afternoon to discuss a path forward. But they remain a long way from signing a bill into law…Republican Senator Lindsey Graham told reporters on Wednesday that the legislative process had ‘pretty much ground to a halt’ amid the tumult in Washington.”
The article went on to say “Several lobbyists said that in the past week their corporate clients have grown more cautious on the prospects for tax reform but still hope that at least a small package can be approved. ‘My worry level has grown considerably,’ one lobbyist said. Some lobbyists suggested that Congress could consider focusing on tax breaks and perhaps leave aside the comprehensive overhaul of the tax code that they had originally hoped for.”
Paul Ryan though is not backing off as at his press conference yesterday he “urged his colleagues to ‘seize the moment’ to pass tax reform.” Let’s hope so.
Asia
Japan’s economy in Q1 grew by 2.2% q/o/q annualized, the best in a year but it was all due to a drop in inflation. Nominal GDP q/o/q was unchanged. Real business spending surprised to the upside while personal spending was one tenth light. The yen is continuing to rally and the Nikkei fell 1.3% along with everyone else.
China’s latest round of trying to contain its property bubble resulted in less cities reporting price gains in April m/o/m. For new apartments, home prices rose in 58 cities vs 62 in March and fell in 8 vs 4 in March. However, prices were up in 69 of the 70 cities surveyed vs 68 in March. The Shanghai property stock index fell .3% overnight. Trying to maintain financial stability at the same time they want to limit credit growth, delever and still grow 6.5% continues to be the Chinese balancing act.
Europe
In Europe, the Fregt10nch mainland unemployment rate saw a sharp 4 tenths m/o/m decline to 9.3% and that was 3 tenths less than expected. It’s also the lowest rate since Q1 2012 and is finally distancing itself from those double digit levels. MFGA!
The UK
After a tough Q1 which saw the worst sales figures since 2010, April brought better retail sales in the UK. Sales ex auto fuel rose 2.3% m/o/m and 4% y/o/y, about double the estimate. As Easter came in April vs March last year, estimating the influence has messed with the numbers even though these numbers are seasonally adjusted. The UK Statistics office said better weather helped but isn’t the weather in April always better? Real wages are falling in the UK and will be a wet blanket on consumer spending the rest of the year.
Peter is the Chief Market Analyst with The Lindsey Group. He is Co-CIO at Bookmark Advisors, a member of the Advisory Services Network and a regular CNBC Contributor.