The Market Needs Another Hit Already?

Dear Reader,

The market needs another hit…

From the Wall Street Journal:

U.S. stocks traded in a narrow range Wednesday as investors assessed prospects for a fresh stimulus bill and the health of major American businesses through their quarterly reports.

Most investors have recently been focused on any developments in Washington over a possible stimulus package. Democratic negotiators and the White House have said they would press ahead with talks on the next coronavirus-relief package, setting aside a Tuesday deadline proposed by House Speaker Nancy Pelosi to hammer out the accord. Mrs. Pelosi signaled there was progress after her conversation with Treasury Secretary Steven Mnuchin.

The two sides didn’t decisively establish whether a deal will be possible before Election Day, though White House chief of staff Mark Meadows said Mrs. Pelosi and the administration are trying to secure an agreement before the weekend. Any deal is likely to face deep opposition from Senate Republicans, especially if the proposed spending package approaches $2 trillion.

Donald Trump likes to tie his credibility to the stock market, often tweeting when the Dow makes new highs. Such a strategy can go either way, but in an election year, it’s usually a good bet. Unless a vicious virus comes along that your enemies politicise like their lives depend on it (which in many cases, they do), such a strategy is usually a good bet.

Thankfully for President Trump, these days, the market is more a reflection of what’s happening in the fiscal and monetary policy front than the real economy. That’s why, despite the US economy still being in a deep hole, the S&P 500 and NASDAQ recently hit new (post-‘rona) highs.

The Dow Jones Index has failed to match them though. I’ll get to that in a moment.

But in the context of the stimulus story above, I doubt Nancy Pelosi is going to do anything that would give the stock market a boost just prior to the election. No, she’s going to do everything possible to starve Trump of his Dow Jones at all-time high tweet just prior to the election.

So the market might be watching this political dance around the next stimulus package with hope and expectation, but I think they’re going to be disappointed.

The bigger question here though is why the market is so desperate for more stimulus? In the year to September 30, the Federal government ran a deficit of US$3 trillion. Where did all the money go?

It merely, and only partially, filled a hole dug by politically-mandated shutdowns.

According to the Federal Reserve’s comprehensive Z1 report, Federal debt growth in the year to 30 June (the latest accounts we have) was $4.1 trillion. This contributed to a huge 10% increase in total non-financial credit growth over the year.

The stock market, of course, was the prime beneficiary of this largesse. Unlike the Fed’s QE, which is merely an asset swap within the financial system, Fed spending flows into the economy and boosts incomes, revenues and earnings.

More than that though, it fires the imagination of stock market investors. They dream of a sustainable recovery, an unending flow of money that will push prices higher and higher.

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The stock market still believes the fiction

And the stock market still believes the fiction that the Fed is ‘printing money’, so how can you lose?

The tricky thing with stock market investing is that you can lose both ways. You lose if you see through the bullsh*t and refuse to play ball. And you lose if you believe the bullsh*t and don’t see the king hit coming.

The only way to play the market is to understand how it really works but go along with it when it wants to believe impossible things. You do this by realising that your opinion doesn’t matter (in the short term). Only the market’s does.

That’s why you should follow the charts. The charts contain fundamental as well as emotional information. And while the fundamentals might be poor in the US economy right now, sentiment is high thanks to the expectation of more and more free money.

For now, the market is ignoring the fact that the constant injections of ‘free money’ comes with the cost of making the economic fundamentals worse. It is sowing the seeds of the market’s long-term demise!

But that’s a conversation for another day. Let’s not mess with the bulls right now. Let them have their stampede.

But I will leave you with this chart of Trump’s Dow:

Port Phillip Publishing

Source: Optuma

[Click to open in a new window]

As you can see, unlike the NASDAQ and S&P 500, it hasn’t been able to make new highs post the March crash. It got close, but then sold off in September. The index rallied again, but more selling came in (forming another ‘lower high’).

The selling of the past few days is about ‘stimulus worries’. But it’s nothing serious. I don’t think anyone is in any doubt that there will be more stimulus. It’s just a matter of when. The worry will be if the market sells off on the actual news of more stimulus and breaks below the September low.

Until that happens, let the market wish for impossible things. And go along for the ride. Just be ready to hop off when it starts to wake up.


Greg Canavan Signature

Greg Canavan,
Editor, The Rum Rebellion

Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts.

At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates.

Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.

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