by Mike O'Rourke, JonesTrading
President Trump appears very intent on fulfilling his “Contract with the American Voter.” One has to appreciate that fact that even Wikipedia notes:
“Election promises may be instrumental in getting an official elected to office. Election promises are often abandoned once in office.”
Thus far, it is clear President Trump has not abandoned anything and is attempting to fulfill his campaign promises to the best of his ability. When the actions the President take are pro-jobs, deregulatory, or indicate fiscal spending, the market has celebrated.
The President’s executive order banning people from Iran, Iraq, Libya, Somalia, Sudan, Syria and Yemen from entering the US is clearly the most controversial action the President has taken. And now, the same corporations that were sitting down with the President over the past couple of weeks are making public statement distancing themselves from the President’s ban.
Is America On The 'Right Track'?
Yesterday's market action might be an indication that there is concern that Trump will follow through on his more divisive measures, thereby ending the financial markets' honeymoon with the new President.
Ironically, Rasmussen Reports released its last week’s US Right Direction/Wrong Track polling data and right track jumped 9 points to its highest level in 12 years (chart below). It will be interesting to see next week’s reading. Yesterday, the equity markets were mildly troubled as the S&P 500 registered its worst performance of the New Year and the Russell 2000 returned to negative territory year to date.
Trump's Executive Orders
President Trump’s latest executive order signed yesterday indicated that for any single regulation an agency enacts, two must be eliminated. The 1 for 2 deal is certainly unique in its construct and is a pro-business measure most market participants support. Trump’s depiction of the order is important.
“We want to end the unfairness between small and big business caused by regulation, regulation that's actually been horrible for big business but has been worse for small business. Plus, small business can't hire the kind of talent that the big businesses can hire, so it's really very unfair. Big business so often can afford compliance with the costly regulations, but I don't want them to. I want them to build new plants, and sell more cars.”
It is imperative to recognize that these regulations often serve as barriers to entry, protecting big business. While we recognize the post-election rising tide has lifted all boats, the market has recognized the difference within the financial sector. Since the election, S&P 600 Small Cap Banks have outperformed S&P 1500 Banks, which have outperformed the large cap Banks in the S&P 500 Diversified Financials (chart below).
Which is It: Stock Market "Bubble" or is it "Not Going Down"?
Thus far, the market has treated everyone as winners to some degree, but when its starts discriminating between winners and losers, investors will begin to identify who has benefited from the barrier to entry regulation created, and those who will benefit from a friendlier environment. In discussing the new executive order yesterday, the President also commented on the equity market. Trump noted:
“The stock market has gone up massively since the election. Everyone's saying -Oh, the market will go down. I said -The market's not going down. You know, the smart people know me. The business people know me, they know what I'm about. So the market went massively up. In fact, when I was elected, a lot of the really smart people went out and bought a lot of stock and they've been rewarded.”
There is no doubt that investors who bought stocks immediately after the election have been rewarded. The President certainly feels different than he did during the debate in September when he argued:
“And believe me: We're in a bubble right now. And the only thing that looks good is the stock market, but if you raise interest rates even a little bit, that's going to come crashing down. We are in a big, fat, ugly bubble. And we better be awfully careful.”
It is not surprising that the President has confidence in his own abilities, but going from “bubble” to “not going down” is intellectually inconsistent and reeks of overconfidence, which is deadly in markets. While confidence sells on television and on the campaign trail, financial markets don’t care what any of us think.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor research note written by Michael O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.
