Is the “Trump Bump” Headed for a “Trump Slump”? The importance of recognizing noise and preparing for increased volatility

TTrump Bump to Trump Slumphough the Ringling Bros. had its final curtain call on Sunday, there doesn’t appear to be an end in sight for the circus that has taken hold of our nation’s capital. For months, markets climbed steadily, despite the tumult in Washington. That changed last Wednesday, May 17, when the market dropped 1.8% ahead of the Justice Department’s appointment of a special prosecutor to investigate alleged ties between President Trump’s campaign and Russia. Despite the panic felt by many investors, by the end of the week it appeared that the market was recovering as Trump left for his first foreign trip as president. Still, many wonder if this could signal the end of the “Trump bump” and the beginning of a “Trump slump.”

Here are four things you need to know:

  1. Recognize “noise”—and learn to ignore it. Events in Washington, D.C., don’t typically play a significant role in the market’s performance. While political issues may cause shocks to the market in the moment, they generally do not affect businesses or the economy in the long run. The reaction we saw to last week’s political developments simply cannot be compared to the genuine economic problems that occurred ten years ago as a result of the debt and housing crises. In short, don’t put too much weight on the day-to-day political headlines.[1]
  2. Market volatility isn’t unusual. American economist Hyman Minsky famously said that “stability is destabilizing.” The market’s current volatility is historically very low. Today’s volatility, as measured by the Chicago Board Options Exchange (CBOE) Volatility Index popularly dubbed “the VIX” is hovering around 11, despite a median level of 16. As a result, if and when volatility rises, it will likely reinsert itself at a stronger rate, and investors should be prepared for that possibility. Diversification of strategies and our policy on cash reserves are Balentine’s first line of defense against such volatility.
  3. Recent sentiment is irrational. Following the November election, there was widespread euphoria regarding the new single-party government’s ability to boost the economy immediately via pro-growth and inflationary policies, such as infrastructure spending and tax breaks. This has turned from disappointment to despondency since the start of the year, culminating in the extreme reaction last Wednesday. Our disciplined model-based approach is designed to take advantage of these extreme swings in sentiment, often creating an opportunity for us to rebalance portfolios proactively, so that they ultimately benefit from the excessive greed and fear.
  4. Fundamentals remain strong in the U.S. and are improving globally. The first quarter of 2017 boasted a 13.9% blended earnings growth rate for companies in the S&P 500, the highest for the index since Q3 of 2011.[2] After lagging during the first eight years of this economic expansion, capital expenditures are rising as business owners gain the confidence to reinvest in their businesses. Second-quarter GDP growth is expected to come in at more than 3%. Economic activity is picking up in Europe and Japan, with expectations for continued global growth.[3] The economic outlook in Europe rose to a two-year high (34.8%), while income expectations remained elevated (58.5%). Meanwhile, exports are a continued source of economic activity in Japan, where the manufacturing sector remains expansionary.[4]

The Trump/Russia probe doesn’t appear to be going away anytime soon, so expect this noise to cause more short-term volatility over the next several months. Despite that, fundamentals continue to improve, and our models show that the equity market is in a good place. Amidst all this—and as difficult as it may sound—it’s important not to make hasty investment decisions. That’s a benefit of hiring an investment advisor—to help you tune out the noise and focus on what really matters. Please contact Balentine with questions regarding any of the above.

[1] See Balentine’s 2017 Capital Markets Forecast for more about the political cycle and markets.

[2] Source: FactSet

[3] This is why Balentine went global during our rebalance earlier this month.

[4] Source: Strategas

 

 

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