David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with DaveThe Globe and Mail
I had been saying for some time to sell into any relief rally that would follow a Clinton victory and buy any plunge on the back of a Trump win.
In a sign of how quickly markets react to events and then move on, as we saw with Brexit last June, the Dow Jones Industrial Average slumped 700 points in the overnight market, to only then rally back to post a surge of nearly 300 points for the day. An epic 1,000 point swing higher on a day when all we got were words and platitudes — no bailout, no TARP, no TALF, no intermeeting Fed rate cut.
Following last June's Brexit vote, the initial selloff was 5 per cent and lasted two days. This selloff lasted about 12 hours and also totaled 5 per cent.
Yes, the market was technically oversold going into the vote, but these gyrations and inconsistent behaviours attest to a manic market .
This is the same market that drove the Dow up 265 points on Monday on the hopes of a Hillary win that then went on to rally 257 points yesterday on the Donald win.
Heads I win, tails you lose.
After the revelation of the Trump "locker room talk", the markets firmed on the view that Hillary would win — her lead for a time pushed into the double digits.
And then, on October 28th came FBI Director Comey's bombshell, prompting nine consecutive down days for the major averages for the first time since 1980. All of this was on the fear of what actually ended up happening — a Trump victory.
Follow me here?
And then Comey's "Act Three," again kiboshing the email investigation, sends Hillary to a three-to-four point lead in the polls and the markets just love it.
Finally, the unthinkable: a Trump win. Markets plunge for a few hours and then all of a sudden Mr. Market starts dreaming about deregulation, tax cuts for everyone and, of course, infrastructure spending, which really has become a motherhood issue.
What is truly amusing is that all this talk about infrastructure was on both platforms and is nothing new, even as Mr. Market just woke up to it.
Not so fast. Now that markets seem giddy over Donald Trump leading them to the Promised Land, it may pay to assess some of the potential roadblocks, or at least why this initial bout of euphoria is likely overdone.
First, Trump thinks he has a strong mandate. But he really doesn't. He does have a mandate, just not as strong as he may think.
He is just the fourth president to have actually won the plurality of electoral college votes with less than half the popular vote — Hillary actually received 250,000 more votes (or 0.4 per cent) than he did. Nearly 70 million of the 129 million votes went against The Donald.
If the tables were turned, there would be no shortage of cries from the Trump team that the system is "rigged" and we would be sitting for months enduring ballot recounts that would make Gore in 2000 look like a tea party.
To repeat: when 52 per cent of the population voted against you and you believe you are the "Chosen One" to enact tremendous change, best to tread carefully.
Besides, at least half his vote, as polls showed, was an anti-Hillary vote — Trump's near-70 per cent "unfavourable" rating is unprecedented and attests to many Americans' distate for having someone with as many perceived skeletons in the closet as Hillary taking the Oval Office.
(I will add that there also was an anti-female element involved. That "nasty woman" comment played well to some, I am sure. I've never heard someone say "nasty man", maybe a "liar" or "low energy", but never "nasty", which is truly a ugly thing to call someone; it's just generally reserved for a female).
Second, while Speaker of the House Paul Ryan did have some platitudes to offer the president-elect, Ryan and Trump don't like each other, and it is not clear they will work well together. The reality is that this is a fiscally arch-conservative House that is not going to have a hole blown through the budget.
For The Donald to get all he wants in this allegedly inflationary stimulus, he will need to have the debt ceiling raised between $700-billion and $1-trillion annually through his tenure. Good luck with that. This will come to a head in March of next year when the current debt ceiling is hit.
Can you imagine the guy who accused Obama of raising more debt than any other President having the temerity of requesting Congress to raise the debt ceiling literally two months after his inauguration?
You can't make this stuff up.
I'm not saying there won't be fiscal stimulus. I'm not saying there won't be infrastructure spending. But guess what? With all deference to the message from Mr. Market, pushing the likes of Caterpillar stock up 8 per cent yesterday, this stimulus is not really going to spin the dial all that much.
Nobody did more to bolster infrastructure spending than former president Dwight D. Eisenhower (a Republican) did with the massive buildup of the highway network in the 1950s. Guess what? We had three recessions that decade.
The much-ballyhooed bricks-and-mortar investment, while clearly exerting long-run cost and productivity benefits, did not prevent the business cycle from doing its job.
Didn't President Obama unveil an $860-billion "shovel ready" infrastructure package in 2009? Government spending and investment added 0.6 per cent to GDP growth that one year, and nothing thereafter. There was a limited fiscal multiplier because the debt-to-GDP ratio was simply too high at the time.
As we have seen in terms of the diminishing returns setting in with respect to monetary policy at the zero-bound, the same holds true with fiscal policy, the effectiveness of which diminishes at higher levels of government debt ratios.
Look at Canada, where the debt ratio is even lower than the U.S., with or without the inclusion of provincial obligations. The Trudeau government got elected 13 months ago on a big and bold infrastructure spending plan, and here we are, with a grand total of 1.2 per cent real GDP growth in the cards for 2016, the second weakest year of the cycle.
Who woulda thunk?
This underscores the ultra-long gestation period involved with this type of public sector capital outlay, and even next year, the contribution to growth from such government investment is likely to be barely higher than a half-point, and even with that, the consensus is around 1.75 per cent for overall headline growth in 2017.
No cause to uncork any champagne if this is what is in store for the U.S. too.
It also begs the question that if public infrastructure is a panacea for the business cycle, why it is that Japan has been stuck in such a rut for so long and still, to this day, mired in deflationary pressure and ultra-low interest rates?
I had thought I would be advising investors to look at the bright side of a Trump presidency in the face of a market meltdown. And now, because of this whippy move to the high side, and all the rationale I am now seeing to explain the move from despair to euphoria in such a short timespan, I am advising caution.
There are parts of the Trump mandate that make sense, but they do have to pay for themselves. Deregulation, a lessened chokehold on the banks, less restriction on oil and gas drilling activity and pipeline expansion, and changes to the costly Affordable Care Act are all positives from my lens.
But let's not lose sight of the uncertainty over his trade and immigration posture, which to me is troublesome and anti-growth.
Not to mention that a December referendum in Italy and elections in Netherlands, Germany and France next year could potentially further shake up the international status quo. Political risks are still rather acute.
Something else to consider about this market mania: the yield on the 10-year U.S. Treasury note surged dramatically to over 2 percent, and for the first time since January, now matches the S&P 500 dividend yield. Again, all on the hope and prayer of Trump-led fiscal reflation.
I suppose there is a greater chance of this happening now than before or even with a Hillary Clinton victory, but from my lens, far too much of this growth and inflation narrative is now priced in.
And if this plays out as it has in Canada — I won't even bring up Japan — then yesterday's euphoria will morph into something closer to impatience and disappointment.
With articles in the USA Today and Wall Street Journal proclaiming that this election would define the Obama era, I was struck with how in just one day, an eight-year presidency was just wiped out. Like a flickering flame.
Watch what happens in Trump's first hundred days; a lot is going to be reversed or repealed. This is why Obama campaigned so hard for Hillary, someone he clearly dislikes, in these last few days.
Only she could preserve his legacy, and in the end, after eight years (the first two with a Democratic Congress to boot), much of what he did will vanish or be altered, and he will be remembered only for being the first African-American President.
While Trump takes office with a high level of national anxiety, pledges for change and a unified government, he does not have the mandate, groundswell of support and backing of his own party, that Obama did.
And as we saw with Obama — and with Bush, Clinton, Reagan, Carter and Nixon — what you see at the outset isn't always what you get.
So the jury is out with Trump, and while we should all keep an open mind, I'm not buying into the inflationary growth forecast that Mr. Market is laying down until the jibber-jabber turns into something durable.
One would have made the same mistake believing that Canada would be a heartbeat away from reflationary growth with a Trudeau majority. In fact, that early view has been so totally blown out of the water that at the latest Bank of Canada policy meeting, Governor Poloz openly contemplated a rate cut.
Then there is the little issue of the Fed. Trump wants it to tighten and, indeed, the odds of a December hike have shot all the way up to 86 per cent.
Mr. Market ought to be careful what it wishes for, because the Fed's zero-interest-rate policy stance this cycle has been the difference between the S&P 500 being at 1,700 or 2,100.
Seriously, if corporate America felt compelled to use cheap debt to fund record levels of share buybacks (more than $500-billion in 2014 and 2015, with a pace to surpass those numbers this year) as well as to fund an epic late-cycle mergers and acquisition boom ($536 billion in October alone), it is a pure reflection of the difficult path CEOs are finding to sustainable growth in organic earnings.
This seems just a little more fundamental to the market outlook than who is sitting in the Oval Office, though like I said, let's keep an open mind.