Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $10B AUM, offering volatility management solutions to its investor base worldwide. Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending shortly after the market close.
The opinions expressed below are my own
Lots of drama, little action. Dip-buyers were controlling the tape early but the gains were modest. The drama of the day was the news that more CEOs were leaving Trump’s various business advisory councils. As CEOs departed, Trump announced that he was dissolving the councils. About that same time, the Fed minutes came out and revealed a debate within the Fed about announcing a specific date for balance sheet reduction. News agencies, especially financial outlets, and Twitter were going bonkers. The stock market dropped (not much) and the bond market rallied (modestly). Capital flow was running at 81% before the headline drama began and finished the day at 86% (not much of an activity boost).
The bottom line is that while the political world is undergoing tectonic shifts, the financial markets are only slightly bumped. This is a bit surprising. When the President suffers greatly, the agenda suffers greatly, and Trump’s agenda was *supposed to be* excellent for business/economics and was *supposed to be* already priced into the markets.
That’s the key. The prevailing consensus was that for all of Trump’s flaws/warts/negatives, his pro-business agenda was going to lift all boats.
That is demonstrably false now. Trump and his agenda are on the rocks and the prominent business leaders that he had at his side are now gone. That is a huge shift… so the markets *must* drop their probabilities going forward….so prices *must* fall…. But they didn’t. So what’s going on?
Here are some ideas. Who knows what’s correct. The point is that the old consensus is wrong/dead. We must think about some other possibilities.
- It’s all about the gridlock
- Markets are priced for gridlock in D.C. and gridlock is good for business (kinda explains rally since election). Whether Trump is popular or not doesn’t change the fact that nothing is going to happen w/r/t new legislation.
- It’s all about the Fed
- Monetary policy has mattered most since ’09 and it continues to be the most important influence on markets.
- Pence is getting priced in
- Markets still expect a pro-business agenda, they just expect Pence to deliver it when Trump resigns/gets impeached/leaves office
You could add whatever you want to this list too. Who knows what the market is really thinking (and in what combination). The point here is simply that Trump’s political swoons are not affecting markets (for whatever reason).
Trump is just not a catalyst. The market abides.
That keeps markets in Calmville and that’s better for the bulls.
The valuations are going to stay stretched until the market is forced to reprice. Presidential drama won’t force it, as demonstrated by today. It looks like only recession, Fed aggressiveness, or war can force it.
See you tomorrow,