Tuesday, January 31, 2017

Equity market takes a necessary pause --- outlook uncertain

Given the strength of the U.S. equity market over the last two months, the decline on Monday and the continued pause today is necessary.  Investors should take a break and assess what's happening.  If markets get too far ahead of themselves, a fall can be more uncontrollable if it eventually comes, and it will.  A correction would be normal, a collapse would be damaging.

It is realized that the potential for corporate tax cuts, regulatory relief for certain industries, benefits for companies that have been hurt by foreign imports, and a more business oriented administration is credited for the ongoing creep up of the stock market after the election.  That may be, but it is also due to the fact that corporate earnings have stayed on track, credit issues in the financial system are minimal, and employment tightening indicates that small business is beginning to have a long awaited revival after the recessionary years.  All of that is due to Obama policies coming to fruition.

The hope that many investors have for the Trump administration is beginning to be tempered by a realization that there will likely be a negative incremental impact in the global markets if the Trump commentary on trade, protectionism, tariffs, currency manipulation, border taxes, and immigration all come to fruition.  Trump boasts about delivering on his promises, and he has got his hand on the throttle of turning his campaign words into action.  This is beginning to unfold in an incoherent way was no seeming overarching vision.  If it continues in this manner,  uncertainty will lead to a slow down in cross border activity and communication, a higher cost of capital in the U.S., and perceived higher degree of risk in international investment.

Both Trump and Bannon's unpredictable rants that have undertones of militarism and can be bellicose, and the "America first" refrain continues to reflect a nationalist throwback.  All of this is counter to what has led to a global economy that has over time led to global growth.  Global growth has led to a growing middle class in many countries, and that is good for world stability and trade.

When this uncertainty gets reflected in the equity market is not known, but if the pace of  incendiary Trump commentary continues it surely will.  Trump's tendency to insult other countries willy nilly as if his words can be taken back the next day with no consequences is bizarre, but we should expect no change.  He is uncontrollable and careless.

This is all being assessed by financial markets now.  The outlook is uncertain.  As difficult as it is to time markets, waiting to make new equity investments may be prudent now.

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