Are the Winds Changing?

We don’t often venture much into traditional Street analysis – especially on the fundamental side of the equation – because: a) it is readily available and mostly indistinguishable; b) few seem to get it right with any consistency; and c) it is usually based upon models that altogether assume rational decision-making as the outcome to its rigorous research conclusions. As we frequently witness quite the opposite results coming from portfolio managers and the markets, themselves, we tend to use fundamental analysis as an important overall backdrop, but not for our actual buy/sell decisions, or the timing of them. For those, we rely far more heavily on our success at being able to consistently exploit the cognitive biases and often emotionally-based and poorly-executed decisions of many professional money managers. (It's how we created a 2017 internal rate of return of 75.07% for our institutional market newsletter readers.)

That being said, the two market swoons this past Tuesday and Thursday were headline driven reactions to somewhat new and potentially non-bullish news for future stock prices. The new FOMC Chairman’s Capitol Hill visit showed us a man who seems rather capable and well-suited for his new role. But did he make a rookie mistake by actually telling us what he thinks about how many rate hikes should occur in 2018, or do we actually have a new Fed head who is going to be less cryptic in his messaging than Yellen, Bernanke, Greenspan, and Volcker were? Time will tell, but the markets clearly weren’t in favor of four hikes becoming a reality this year (though, again, this wasn’t altogether a completely new idea out of left field).

Secondly, President Trump’s Thursday tweet announcing one of his campaign promises to impose trade tariffs on steel and aluminum even caught his own advisory team by surprise. A trade war is certainly not what most Americans want in a still growing interdependent global trading universe, nor is directly ticking off (and most likely negatively impacting the economies of) our NAFTA partners something most of us want to see, either. In fact, barring just a few American steel and aluminum company’s own bottom lines, we’re not sure anyone benefits from the US imposing these tariffs. We know that new trade restrictions will produce a “You do this to us; we’ll do it back to you” scenario with many of our trading partners, such that no one wins. (Trump should learn a thing or two about Game Theory before he makes statements that seemingly put the global perception of the US in an even worse position than it has already become.)

We bring up these two factors that moved markets lower last week because we can see just how sensitive investor psyche has become. Upcoming behavioral shifts in previous staunch bulls may become a bigger influence in future market movements than we’ve already seen this past month, as the constant uncertainty surrounding “What is Trump going to say or do next?” can easily stall business investment, and therefore, the chance for stocks to continue upward at any similar pace than they’ve seen over the past several years.