More than anything else, the best way to characterize the global markets this year is a persistent relative calm with only intermittent “hiccups.” These hiccups repeatedly seem like the first salvos of a correction, yet have just as reliably turned out to be merely transient (as the Fed is fond of saying of various risks).
Nonetheless, an array of risks to the markets remain in place, if perhaps overlooked by the inundating flow of news and intrigue out of Washington. We’ll look at some of the key factors driving—or distorting—the global economy in the near-term as we charge full bore into the Trump era.
Reform and Legislation in the U.S.
So far this year, in contrast to the reaction of the Beltway media, Wall St loves the Trump administration’s talk of tax reform, healthcare reform, and increased defense spending. All three of the major U.S. stock indices—the Dow Jones Industrials, the S&P 500, and the Nasdaq—have continued to rally to all-time highs.
Really, this is all based on expectations, even if the legislative changes never come! Like futures markets (and especially the crude oil market), this is purely speculative. The Congress and the new presidential administration have shown no real ability or track record of accomplishing any of Trump’s initiatives, although the “skinny budget” recently proposed by the White House would meet a lot of the investing class’s desires for tax cuts.
The international markets, however, have largely taken a different view of the “Trump Effect” on equities. Geopolitics loom large, from the Korean peninsula to civil war in Syria to another corruption scandal in Brazil. Not to mention that the U.K. just suffered a tragic terror attack. Gold has gotten a slight boost in demand amid the turmoil, and may have established a fairly strong support level of $1,250/oz for the time being.
It’s also beneficial to the gold price that there is a growing sense we may be seeing a shift toward a weak dollar policy. The USD had lost almost 5% against its major peers over the past week or so. This may actually make the impact of higher interest rates, which typically correlate with a stronger dollar, less dramatic.
First-quarter earnings season for Wall St has also had some influence on equity prices climbing higher. Despite retail giants getting hammered, earnings have generally been solid, particularly for defense stocks. The trend of stocks shrugging off any controversies surrounding Trump has a strong precedent, as well: during the last government shutdown in 2013, the S&P 500 actually gained 1.6% during the crisis.
Mergers & Acquisitions
Another short-term driver has been a rise in potential M&As lately. Major companies are definitely in consolidation mode, as that seems to be where the best value for using their excess capital.
Here’s a quick run-down of the latest corporate mergers and acquisitions, in serial form:
Coach plans to buy luxury retail rival Kate Spade for $2.4 billion. Sinclar Broadcast Group, the largest ownership group of television stations in the country, is set to buy Tribune Media for $3.9 billion. The rating and analytics company Moody’s buys Dutch business intelligence company Bureau van Dijk for $3.3 billion. Thermo Fisher buys drug ingredients maker Patheon for $5.2 billion. From the opposite side of the fence, Western Digital is trying to block Toshiba from selling its chip-making business. Finally, this is not quite an M&A story, but competitors Comcast and Charter, the two biggest cable companies in the U.S., are partnering to develop wireless solutions to providing cable services.
There is, of course, always the looming threat of a severe market downturn as part of a possible “reset” of asset prices. This idea of a “Great [Financial] Reset” has been made convincingly clear by several alternative investment newsletters like The Casey Report and Maudlin Economics.
Everyone knows the conventional wisdom of the disclaimer that past performance is no guarantee of future returns with any investment. True as that may be, it doesn’t mean lessons can be learned from the past, and that longitudinal (long-term) market behavior in the past shouldn’t be examined and taken into account. Markets appear to be distorted from a number of different vantage points, while real interest rates remain negative in much of the developed world and other unprecedented policies are being attempted within the financial sector. Don’t forget that the world’s almost unfathomably large debt burden only continues to grow ever-faster.
Almost like the inevitable but unscheduled return of the messiah, the theoretical market reset could happen at any time, given the number of risk factors that could potentially be unwound by a “black swan” event. The massive expansion of derivative assets, the sky-high level of leveraging by governments, big companies and financial firms, along with the inflation of apparent asset bubbles has lined up the dominoes once again for a 2008-style financial crisis scenario. All it takes is for the first domino to fall.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.