Well, it’s time to revisit the thesis from 60,000 feet up in the air and make a rather substantial change in my overall market view. In fact, what is most important is less my personal opinion of the backdrop but rather anticipating how investors, broadly speaking, will be assessing the financial market landscape, and what will ultimately cause perceptions to shift.
Until they do, I personally advocate a broad move into cash, because garnering a safe 4.5% yield from U.S. T-bills and money market funds is likely going to be a home run as the initial phase of the second Trump era causes bond investors to continue to shun duration exposure, and ever-rising risks and uncertainties undercut a U.S. stock market trading in the most expensive 5% tranche in recorded history.
The Treasury market had already begun to discount a period of heightened policy uncertainty a month before the election and now it is the equity market’s turn.
Even with the manic reaction to the election results, the S&P 500 has now retreated in three of the past four weeks and as of the start of Monday, sat a sliver below its 21-day trendline. The fact that it still holds a gain of 23.1% for 2024 reveals just how much air there is under this thing.
All the major averages – the S&P 500, the Nasdaq Composite, and the Russell 2000 – have now undercut the lows of the November 6th postelection gap-up day.
It should really not be lost on anyone that this has not been an “earnings-driven” rally but rather a “sentiment-driven” rally because if it were earnings doing the heavy lifting, the S&P 500 right now would be trading at 4,860. Not only that, but the analyst earnings upgrade-downgrade revision ratio has just turned negative and is at the second-lowest level of the past year.
Not a good look. Breaking any lower from here in the S&P 500 would represent a rather bearish development.
We are in the process of witnessing a key test here as the initial Trump winners are now round-tripping in a major way, and many stocks flashing “buy signals” less than two weeks ago are now faltering badly.
Now is definitely not the time to be loading up on risk. I do not view this sudden and steep pullback in the major averages to have been just a simple aberration. Rather, a more fundamental re-evaluation of the high and rising risks ahead, principally the one thing Donald Trump can do independently, which is an epic hike to tariffs – 60% on China and a blanket 20% jump for everyone else.
We really shouldn’t underestimate how important this is to the President-elect as an old-style mercantile industrial policy, nor should we underestimate the responses by other countries. Either governments elsewhere begin a process of negotiation and appeasement ahead of time, or we risk a backlash that could bring the world to a 1930s-style “beggar-thy-neighbor” global trade war. We should pray for the former but still be discounting some non-trivial risk of the latter.
Warren Buffett, after all, has built a massive, indeed record, US$325 billion cash hoard in light of all this uncertainty – half of that built up just this year alone (and his reporting showed that this usual optimist took down his equity position in the third quarter).
Jay Powell has subtly altered his dovish stance since the recent FOMC meeting, and the futures market is now down to 60% odds of another 25-basis point rate cut at the December 17th -18th FOMC meeting, from 72% on Nov. 14 (the day he said the Fed is now in no hurry to ease policy any further), and 86% in mid-October. In fact, the market-based odds of there being just one or no rate reductions between now and June 2025 have swelled to 28% from just 1% a month ago.
Donald Trump’s early choices for key positions were pretty solid on the international front, in my opinion, but he has driven the car off the road on some of his domestic picks, which seem more based on blind loyalty than experience or talent – Matt Gaetz for Attorney General, Pete Hegseth for Defense Secretary, Tulsi Gabbard for Director of National Intelligence, and Kristi Noem for Secretary of Homeland Security are too bizarre to contemplate and speak to the President-elect’s erratic behavior.
He has already raided the House to a point where there is the slimmest of GOP majorities, and it looks as though he is going to have a devil of a time getting his myriad tax cuts legislated – in contrast to his first go at it from 2016 to 2018, the GOP representatives in the House are not too keen on more deficit stimulus.
The stock market will have to deal with that, especially the dreams of a 15% top marginal corporate tax rate.
Of course, there is all the “dereg!” coming, and that is business-friendly for equities and disinflationary for bonds – in addition to any success Elon Musk has in his drive to cut the fat out of federal government spending (there is actually less here that spins the dial on deficit reduction than is advertised). But the overall economic impacts here are glacial in nature and exert a less direct effect on growth and inflation than the magnitude and breadth of the tariff increases that Trump is proposing.
The bottom line is that nobody really knows what he is going to do or not do, or what he will be able to do. The stock market quickly took out the 2016-2018 GOP sweep playbook after this election, without seeming to comprehend that this is not the same House (much more disturbed by the current state of domestic fiscal affairs) or Senate (several there voted to impeach Trump – keep that in mind). Not the same Congress, and the Republicans full well know that unlike 2016, this was not an election that Trump actually won, but rather was one that Harris (and Biden) lost (underscored by the very low Democratic turnout).
Many Trump voters blocked their nose at the polling booths, fearing the leftist drift by the Democrats more than the unpredictability inherent in a Trump presidency. And unpredictability is exactly what we have on our hands. We are in a complete policy bog, and we should probably be behaving like Buffett and Powell, which is acting prudently at a time of reemerging tail risks and heightened uncertainty.
Greater uncertainty means (or should in any event) this to an investment community: reduced risk tolerance. This applies to equities (reduce exposure), Treasuries (shorten duration), and credit (step up in quality). Dollar strength, which is the natural byproduct of U.S. tariffs, means gold (yes, gold) and commodities will be in the penalty box. Bitcoin, to me, is a different way to play at the craps tables in Vegas, and too much of a speculative game for my liking (I mean, seriously, it broke to new highs because the crypto industry supported his candidacy? That’s an investment thesis?). If you want an inflation hedge that won’t hurt you as the dollar appreciates, perhaps think of the Treasury Inflation-Protected Securities (TIPS) market.
The prospect of a Chinese yuan devaluation stemming from a 60% Trump tariff is real and would likely trigger mega capital outflows and major weakness and instability across Asia and Emerging Markets (which has already started). China is still grappling with the property market bust, and the size of the proposed tariffs for an economy still highly dependent on exports would likely be devastating. We are talking about the second-largest economy in the world here, and the global reverberations would be significant – and another nail in the coffin for the industrial commodity complex, along with oil.
What Trump would also do, if his trade policy is enacted (keeping in mind that Congress relinquished any control with this domain many moons ago) would be to annihilate the German car industry, so you can kiss the fragile European economy goodbye as well.
Mexico and Canada, given their intense trade ties with the U.S., wouldn’t fare well either, to put it mildly.
For the time being – not forever, but for now – at least you will get paid to wait and not have your head sliced off if you are positioned the wrong way by shifting the portfolio more heavily into cold hard cash.
Again, you do what you want to do; I am not telling anyone what to do (and I never do)… I am simply telling you what I am doing.
My advice is obviously not always spot on, but my track record in one respect speaks for itself, which is this: in my four decades in this business, the only year I generated a net loss in my own asset mix was in 1987, and only by a whisker. Losing money is a much bigger deal to me than not making as much as my neighbor in any given year, and I don’t plan on changing that mindset now.
While a tariff, on its own, is not inflationary as a one-off event, the size of what Donald Trump has pledged is absolutely massive and would represent a triple shock to the U.S. economy – a price shock (and on the part of society that has the highest marginal propensities to consume), a dollar shock (which would negate part of the benefit to the industrial sector from this form of trade protectionism), and a rates shock, because the Fed is hardly likely to sit idle if it feels that hiking tariffs in a 4% jobless rate economy will rekindle inflation expectations and higher wage settlements (I don’t think they will, but this is a risk nonetheless and the central bank is already pulling back on its prior dovish rhetoric because of this prospect).
We may end up being pleasantly surprised that Congress has managed to prevent the most damaging debt-busting pledges of the Trump campaign from occurring and that the tariff threat was just that – a threat. Or we may end up with a ton of damage to public finances, inflation, and the current perception of relentless economic prosperity. Tariffs make for poor industrial policy, but that is not what people like Donald Trump and Robert Lighthizer believe, and then we must consider the law of unintended consequences if other countries retaliate – it has been known to happen, even against the United States.
The challenge for any investor is that there is simply too much uncertainty, and this is no time to be playing a guessing game. We just do not have enough conviction to know what will happen and the stakes are extremely high. In my view, it is better to wait it out and make a more informed decision when the dust settles.
Nothing right now is as important as this tariff issue and the other policy planks, which may or may not live to see the light of day.
All the economic data are going to be taking a back seat to the fiscal and trade policy background for many months to come. And believe me – while Jay Powell claims the Fed will not allow policy speculation to influence its decisions, once Trump’s decisions are made, he will act.
Which is why, right now, my conviction over the interest rate call is way below where it typically is. That indeed is a sea change in view, though I do look forward to the day when the crystal ball is less cloudy.
The bottom line: I am emphatic in the view that, at least until the policy dust settles, when today’s tail risks inevitably vanish, prudence requires a decision to reduce risk across all asset classes. Once we have a better handle on when this extremely uncertain policy outlook is going to be resolved, we will be able to go back to the drawing board and put that cash to work.
Depending on the outcome and how the markets behave over the near- and intermediate term, who knows – I may even turn bullish on equities. And I will relish the opportunity to go long bonds again, which has been my natural habitat, and the Treasury market, unlike the stock market, has at least already corrected sufficiently to make it look interesting – especially since so much Fed easing has already been removed.
But I am reluctant for the time being to be buying long-dated securities of any kind, keeping my powder dry, ensuring that I am highly liquid, and ready to re-engage in a future environment where the bands of uncertainty have sufficiently narrowed, forecasting confidence levels re-established, and a more investable climate where risk can be more appropriately priced have been restored.
David Rosenberg is founder of Rosenberg Research.
Read more from David Rosenberg:
Why I feel sorry for Donald Trump
Investors are partying like it’s 2016-2018 again under Trump. That’s a mistake
Chill, bond investors. There’s no reason to hyperventilate over the inflation threat posed by Trump
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