WASHINGTON, March 29, 2018: Like most investors (save for happy perma-bears), our portfolios took a hit in Q1 2018. After a New Year’s outburst of irrational exuberance, the ess hit the fan. As always, you end up forced to choose. The question: Are you bullish or bearish and why?
Ironically, the Q1 2018 waterfall decline in stocks and market averages got underway not long after President Trump’s upbeat State of the Union (SOU) Address. While Democrats sat stony-faced and pouting like the arrested-development teenagers that they really are, the President crowed about the previous year’s economic boom under his deregulating stewardship. In particular, he pointed to the huge, optimistic gains stocks were posting on Wall Street.
Personally, we enjoyed this bit of Trumpian triumphalism, particularly in light of the illegal rear-guard actions the leftist Swamp has been waging against the current administration. But we also winced a bit at the President’s upbeat remarks on the market. Was this bullish or bearish?
The problem of hubris
All presidents like to proclaim their brilliance each year during the SOU address. But as regular readers of our columns know, we live in constant fear that either we or those we support will get carried away.
We all love to proclaim the good news while taking credit for having caused it ourselves, the logical result of our own unsurpassed brilliance. The problem is, in so doing, we always risk unleashing the gods of destruction, even if what we proclaim is actually true.
After all, crowing about our own brilliance feels good, particularly when we’ve actually earned credit for it. But the ancient Greeks routinely regarded such plumage displays as “hubris.” The simplest modern translation for this term is “pride.” Or, perhaps, “YUGE pride.” But as most of us know, pride goeth before a fall.
This is precisely what made us nervous about this year’s SOU address. Seemingly within hours of that address, stock market averages peaked. This was the cue for Mr. Market had been waiting for. He promptly decided to stage a spectacular waterfall decline in nearly all listed stocks.
Not one, but two tremendous market crashes in February left optimistic investors shell-shocked. Since then, every time markets have attempted to stage a rally, they’ve been slapped back down brutally by another tsunami of relentless selling. Hubris can lead to bullish or bearish outcomes. This time, the bulls got tagged.
Are the gods angry with Wall Street’s bulls?
It’s all been sobering, making us wonder once again if President Trump – who we continue to strenuously support, BTW – didn’t trigger those angry gods just a little too far with that triumphal SOU address. The President’s justifiable pride in his administration’s accomplishments was actually well earned. Indeed, a victory lap was clearly appropriate after the big GOP tax cut the president’s support helped pass during last year’s routinely do-nothing Congress. After all, they’d already botched a lame attempt to repeal and replace Obamacare.
Meanwhile, no one in the media is eager to mention the President’s business-freeing, behind-the-scenes, slash and burn attack on hundreds of business-killing Obama-era regulations.
That said hubris is still hubris, and you have to watch out when you indulge in it. February’s market crushing Super Slam confirmed this observation. So watching out is exactly what we’re doing right now, even as we look forward to Q2 2018, which begins Monday, April 2. Bullish or bearish? Right now, we’re not entirely sure.
Bullish or bearish portfolio adjustments ahead?
Our messy portfolios badly need a fresh start. Many of our brilliant trading moves in 2017 suddenly turned to ashes in February 2018. Whether we come out as bullish or bearish, our portfolios, as our Southern friends like to say, sure need fixed in either case. This week’s Good Friday holiday gives us a long weekend to look at the current stats and see if we can’t find some real game-changers as Q2 2018 gets underway.
First of all, we need to look at the revised reality of the U.S. economy’s performance in Q4 2017. Revised figures came in earlier this week, estimating the country’s GDP to have increased by +2.9 percent.
Consumer confidence continues to grow. Taxpayers saw in their February paychecks the true meaning of the GOP tax cut. Personal spending is likely to increase more vigorously as a result.
The Fed and Congress blunder on
Unfortunately, the Federal Reserve, in perpetual dread of being behind the economic curve, will keep jacking up interest rates unnecessarily, likely leading to some kind of recession by 2019. They’d ought to leave well enough alone until they see real (rather than imagined) signs of inflation.
In the meantime, interest rates keep ratcheting up. This threatens to stifle the building and selling of new homes while squishing the sales of old ones. If related mortgage interest rates tick much higher, housing and the building trades will suffer, precisely when everything is primed to take off.
To complicate things further, there’s also Congress’ passage of that bloated $1.3 trillion spending bill last week. With those 2018 midterm elections just around the corner, this bill gave the Democrats all the vote-buying power they wanted. But that bill also managed to evade – yet again – explicitly funding President Trump’s oft-promised border wall.
Perhaps even more egregiously, the massive 2018 spending bill also avoided any mention of a final DACA solution. The Democrats claim they want to solve the issue. But they don’t. The President insists that must include full funding for his Wall in any DACA solution Congress passes. The Democrats, for their part, don’t give a damn. They won’t vote for such a bill, even if it gives them 800,000 to 2,000,000 new voters this fall. They just want DACA as perpetual anti-GOP leverage. Will Hispanic-American voters figure this out before they head for the polls this November? 70-30 against that outcome right now.
So where’s the “trade war”?
On the international front, economic issues continue to boil, largely resulting from President Trump’s threatened tariff regime. The blow-dried cretins and broadcast babes posing as journalists label these threatened tariffs as Trump’s “trade war.” But they ignore the fact that the Eurozone and China have waged a continuous trade war against U.S. products for decades.
This “trade war” nonsense will likely play out primarily in Q2 and Q3 2018. As a result, the constant negative reportage is likely to batter markets to and fro throughout this entire period as well, perhaps affecting this fall’s election results as well. This means they’re still waving the caution flag on Wall Street.
Next: How do we fix our bombed-out portfolios to ride out Q2 2018?