Markets In Flux: Investors Facing More Chaos In 2017

Jeff Voudrie

Confusion, Chaos and Conflict

In my last weekly commentary I referenced a book that referred to Donald Trump as the ‘Chaos Candidate’. What we have witnessed in the last two weeks sure fits the definition of chaos:

We have seen contentious nominee hearings. We have seen Democrats boycott the hearings to delay votes, thus very few votes have occurred for his nominees.

The Republicans at the meeting in Philadelphia seem to be singing the same establishment tune they have been for months/years. (and that has resulted in low approval ratings)

Now we have a Supreme Court nominee where President Trump is already suggesting using the ‘nuclear option’ to get Gorsuch appointed. Doing so could possibly change the threshold of all future Supreme Court nominations.

Then there’s the ‘extreme vetting’ / ban on Muslims/refugees from 7 specific countries.

He’s put Iran on notice.

AND THIS IS ONLY THE THIRD WEEK!

Some recent sayings that I have heard hint at the probable chaos ahead:

“Impeachment by the 2nd year” attributed to some prominent establishment Republicans.

“Scorched earth-resistance” as the playbook of Democrats.

This commentary isn’t typically about politics but the politics of chaos are sure to have an impact on the financial markets. Some believe that President Trump is an ignorant fool that is out of his depth. I believe that’s what he wants people to think to keep them questioning. Is it unreasonable that an owner of casinos would understand Game Theory? Here is a quote for Prof. Barash:

“When playing chicken it is best to convince your opponent that either:

  • You have no alternative course of action and so CANNOT compromise (“my constituents won’t let me back down”), the Democrat approach?

or

  • You are stone-cold crazy and could care less about the consequences to yourself (“I will take you down with me if that’s how it has to be!”). The Trump approach?

Conclusion: If Trump keeps his competitors guessing what type of crazy he is, then he has already won.”

 

So, what are the financial implications of chaos?

The markets don’t like uncertainty; they don’t know how to factor in chaos on their spreadsheets. So it increases the risk associated with investing. The US Stock market rallied in the week or two after the election but has been moving sideways since then. From December 8th thru today, the S&P 500 (INDEXSP:.INX) has gained less than 1%. That period encompasses 38 trading days; 19 of those days have been up and 19 have been down. One surprising aspect is that market volatility has been low during this time, likely because few are willing to place substantial bets either way.

Many investors would have expected President Trump’s pro-growth policies to result in a higher stock market. And it may well end up that way but the question is, how long will it take? Currently the economic data shows that the economy is growing. And we are seeing inflation at or above the Federal Reserve’s target of 2%. Is there enough strength in our economy to withstand chaos and rising interest rates?

Will enough of Trump’s agenda get passed and will it help our economy resume 3-4% GDP growth?

At this point, I have more questions than I have answers. It is possible that a chaotic political environment will be a hallmark of a Trump Presidency. And his positions may very well result in greater uncertainty worldwide.

Amidst this chaos I currently have my portfolios positioned with roughly 50 percent invested in equities using a combination of mutual funds and/or individual stocks while keeping the other half in cash (or cash-like) instruments.

 

Twitter:  @JeffVoudrie

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.

 

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