Stag Party
Since the U.S. election, the Republican party has been in party mode. Flush with confidence from a narrow but decisive mandate, MAGA is cheerleading each Trump executive order with gusto. Save for one sex offender, all their nominees for key posts in the new administration have now been ensconced in the various posts. These Trump loyalists and unqualified sycophants have begun implementing his vision, however dystopian it may be. The Deep State Disruption party is in full swing.
Meanwhile, on Wall Street, the mood is growing ever more depressed. Investor sentiment has collapsed. The AAII sentiment survey shown below has reversed sharply from its post-election optimism. The initial take on tariffs was a complacent dismissal of the negative inflationary effects. A grim realization that economic growth, not prices, will be the dependent variable most impacted has soured expectations for the year ahead. A grinding stagnation is now the dominant narrative among market commentaries.
AAII Bull/Bear Ratio
Lately, data releases relating to output have begun to fade while inflation remains stubbornly above target. And that, before the tariff effects filter through to final prices. Stagflation, last witnessed firsthand by consumers in the 1970s, has returned. I remember it well. You had to ask for a raise every six months just to stay in the same place financially. Forget trying to get ahead of the curve.
Lumber prices are up a quick 20% from November and still rising. The housing market has taken this cycle off, with weakening supply but even more tepid demand. Affordability is the Achilles heel that seems intractable and immune to policy fixes. But housing costs will rise nonetheless, spurred by raw materials prices and labour tightness. Rental market tightness due to past underbuilding has squeezed disposable incomes.
Auto inventories have suddenly risen. Consumers are pulling back from big-ticket purchases more rapidly than ever in the past 4 years. A foreboding negativity in the American consumer has replaced the election euphoria. The sugar highs of American exceptionalism are wearing thin now that the policy mix promoted by Trump advisors Navarro and Lutnick has been brought to bear on an already weakening economy.
This is also reflected in the starling collapse of the Atlanta Fed's GDP Now reading of expectations for growth. I have never seen such a reversal of data like this that didn't reflect a sharp spike in interest rates or a major geopolitical externality. The sudden realization that Trump's toxic policy mix will concuss the economy has produced a sharp reversal of growth expectations.
Tariffs and immigration policies today are different animals than was seen in Trump's first term in 2017. They are now more likely to be persistent, albeit at lower levels than initially implemented. The market must realize that Trump is willing to accept some pain as his vision of 'America First' underpins his stance. But at some point - unemployment above 5% or the stock market down 10% - the pain might be too much. The Fed is being urged to act by the money markets, as a 75 basis point implied easing has quickly been priced in this week.
So, the implications of slower potential growth and an elevated level of uncertainty have descended on consumers and investors. Until now, there has been a level of denial that failed to accept that Trump 2.0 means business. Too much has been made of the 'Art of the Deal' strategy template. Trump has been drinking the tariff kool-aid that Navarro has been mixing for eight years now. Getting his attention will take more than a 5% pullback in the overvalued stock market. The caution that I have advocated recently has paid off and we still should act cautiously.
The 'Trump Put' I spoke of may come into play shortly should this week's market action test the 200-day moving average or lower. A bounce can be anticipated, but I have lingering doubts about Trump's ultimate goals for U.S. dominance. Will he actually listen to markets? Will he actually temper his vitriol and produce a Kumbya reconciliation? Given his shocking performance last week on the Ukraine file, one has to wonder if something more is at work here. Cue the Russian mob conspiracy theory if you want to really worry.
So, if we put aside that, is there an entry point now that the worst fears have been realized? The currency markets have dug in their heels. USDCAD tested $1.45 but failed this morning, and the Euro has broken out of recent consolidation. Currencies are telling us to buy the dip here. But what to buy for the Tuesat11 turnaround?
My ex-partner and current favourite stock jockey, Greg Taylor, is in this morning's Bloomberg with a good bet.
You have heard me extoll the virtues of hard assets as diversification in the inflation-prone decade ahead. The recent weakness, more sentiment-driven than real, provides an excellent entry point. Teck is better than Tech, in my view.
So, despite this piece's depressing stag party tone, I'm recommending a cyclical rebound play will soon begin. Fiscal stimulus in China and Europe in response to the tariffs and Ukraine will be the drivers. But that is sometimes how it works. Sometimes, you gotta close your eyes, hold your nose and buy the dip. The trader in me sometimes wins out. Party on!
Risk Model: 2/5 - Risk Off
After correctly calling the sell-off, it remains for the markets to reach an oversold condition sufficient to call for a reversal of my "get out" call made last week. I don't see it yet. I'd like to see the % of stocks below their 50 DMA closer to 20% (chart below). Tonight's SOTU may further chill investor sentiment, and further tariff concerns are yet to be priced.
This week may provide a long-awaited cathartic dip should the tariff war escalate further than what has already transpired. Prime Minister Trudeau has posited "non-tariff actions" that may include export controls on energy. These are also in arrows in Doug Ford's quiver of retaliation. Cutting electricity and crude oil exports is perhaps a nuclear option, but just the threat of it (Art of the Deal, Canadian style) would be a great start.
FAFO, Trump.
Percent of Stocks Below 50 DMA
