“To expect defeat is nine-tenths of defeat itself.” (Henry Louis Mencken)
The Fruits of Surprises
Typically, it is critical to be a visionary in financial markets when looking to capitalize on the limited opportunities. Now, being a visionary and nimble investor is even more important. The broad US Stock Markets were dripping lower ahead of the elections, but since the election results, the S&P 500 index has exploded. The same cheerfulness applies to Crude prices, which were already was bottoming ahead of the OPEC supply-cut announcement. As if 2016 did not remind us of surprises of all kinds, it is worth reiterating as a constant reminder to fathom the unfathomable in order to pursue fruitful returns. In saturated liquid markets, with more sophisticated technology, rapid processing of information is paramount. In which global participants with capital are eager for returns, there is not much time to hesitate when an opportunity opens up. Investors are faced with the choice of chasing returns or being anxious enough to stay on the sideline.
Gauging Expectations
The anticipation of a Trump-era brings some hope and, in some ways, anticipated relief from the current administration approach and financial market status-quo. The relief from a Trump victory is the hope of departing a defeatist attitude towards business and regulation and creating a more robust attitude and actions towards growth. Beyond the hype and political posturing, there is demand for positive sentiment regarding the real economy. If the real economy fails to deliver and recession-like symptoms begin to circulate, then the sour turn from optimism to rapid panic is likely. One factor that’s noteworthy is business owners looking to sell their business (more on this below). Again, financial markets might be super-thrilled about Trump, but small businesses were unhappy with the establishment and still skeptical regarding real growth.
In terms of financial markets, that's presumed to mean a shift away from near zero percent interest rates and growing emphasis on fiscal policy. The built-in expectations for Trump’s administration includes: more infrastructure spending, repatriation, various tax cuts, lower regulations, less influence by central banks leading to higher rates, a favorable climate for energy and promotion of Brexit like outcomes in Europe. Already, these factors are more or less priced in and hardly viewed as shocks, which present a challenge for value investors seeking bargains. However, a breather is needed after a run like this, not just from a correction point of view but also from an expectation perspective. There is the dark side of the market cycle that can derail euphoric responses. When expectations are too high and valuations are high as well, then it's even harder to visualize continuation without turbulence. Surely, that's in the back of the minds of money managers grappling with the paradoxical set-up.
Emotional Test
Participants, in a macro-managing manner, are attempting to script the Trump narrative with an accurate play by play. Inherently, that'll lead to disappointment (in domestic and foreign policy), as many factors can shape the decision of a new coming president and congress, not to mention the multiple elections that wait in Europe. If surprises are "game-changing" events, then why have high conviction on the potential script that will emerge? The mental test for participants is to shake the age-old complacency of low interest rates, low volatility and higher stock prices toward more fluid and vibrant responses to a market that's both anxious and euphoric. The swing from anxiousness, due to many unforeseeable events, versus euphoric responses driven by hope can blur the thinking process for market participants.
The Trump-Putin alliance, a dislike of some, is viewed as positive for the energy sector to go along with OPEC’s moves. Further election results that favor nationalism in Europe are expected to further weaken European Union, which already is trying to manage multiple crises. Similarly, the UK and Eurozone are set to face pressure regarding maintaining low interest rates; thus stirring optimism will remain challenging. The ongoing banking crisis in Europe will stir further concern as finding stability appears difficult for now; that includes a more vulnerable Euro. All that said, there are many market events that will test investors’ nerves. Reacting wisely to the unexpected might be the ultimate reward in 2017.
Article Quotes:
“Small business listings reach record high: Sellers continue to supply the market with a record number of listings, as the supply rose 5.1 percent from Q3 of 2015. The surge in listings could be due to a sense of urgency felt by those small business owners that are hesitant about sale prospects in 2017. According to BizBuySell’s recent confidence survey of buyers and sellers, less than half of sellers feel they could hold out for a year and receive a higher price for their business. Retiring baby boomers, in particular, are likely more motivated to sell now rather than drag the process out or risk having to wait out another economic downturn. With both buyers and sellers ready to act now, transactions are also taking place at a faster rate. A business sold in Q3 was on the market for an average of 171 days, a 4.5 percent decrease from 179 days in Q3 of 2015. This marks a steady drop from Q1 of this year, when the average days on market was 188 days.” (American City Business Journals, December 23, 2016)
“U.S. energy companies added oil rigs for an eighth week in a row, extending a seven-month drilling recovery as crude prices remained near a 17-month high. Drillers added 13 oil rigs in the week to Dec. 23, bringing the total count up to 523, the most since December 2015, but still below the 538 rigs seen a year ago, energy services firm Baker Hughes Inc said on Friday. That was the third straight week of double-digit rig increases, a sign the industry has accelerated spending on new production now that crude prices have mostly held over $50 a barrel for a fourth week…. Analysts at U.S. financial services firm Cowen & Co said in a note this week that its capital expenditure tracking showed 23 exploration and production (E&P) companies planned to increase spending by an average of 35 percent in 2017 over 2016.” (Reuters, December 23, 2016)
Key Levels: (Prices as of Close: December 23, 2016)
S&P 500 Index [2,263.79] – From November 4 lows of 2,083 to the highs of December 13 (2277.53), the index has jumped over 9%. Post election rally is resounding and possibly neutralizing around current levels.
Crude (Spot) [$53.02] – From November 14 lows of $42 to December 12 highs of $54.51, a near 30% rally in less than a month demonstrates not only the OPEC deal but a shift in sentiment.
Gold [$1131.35] – A downtrend remains in place. Since July 8, 2016 the commodity has dropped over 17%.
DXY – US Dollar Index [103.01] – The strength remains in place at a multi-year high. The last 3 years have solidified the Dollar not only as a strong currency but in high demand for circulation.
US 10 Year Treasury Yields [2.53%] – After peaking at a 2.61 intra-day high on December 13, 2016, yields are stabilizing between 2.40-2.60%.
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