Market Direction Mid Week Update©

Market Direction: BULLISH alert issued 11/10/2016

The stock market has rallied since the presidential election on expectations fiscal-stimulus policies proposed by Donald Trump will benefit the economy. That might be justified, but that doesn’t mean the stock market can continue to rally in the short run.

Longer-term positive influences from fiscal-policy improvements, instead of monetary-policy stimulus, are clear. Still, those positives won’t be immediate.

Part of Trump’s fiscal policy targets mainstream America, not asset classes such as the stock market, bond market and real estate as monetary stimulus does. That is largely why fiscal improvements can have lasting influence, though they take a long time to be realized.

Fiscal policies take time

 

Laying the groundwork for new U.S. manufacturing jobs takes time; putting money in the hands of working-class Americans takes time; and getting them to spend more aggressively and invest that money takes even more time. That is sustainable, whereas monetary policy stimulus is not. So there is a huge added value to favorable fiscal policies.

The problem exists in the near, not the long, term. On a near-term basis, the hand-off from monetary-policy stimulus to fiscal-policy improvements can have a material adverse impact on asset classes.

Furthermore, when monetary policy is tightening, as it is in the U.S., liquidity levels begin to dry up and fabricated demand influenced by monetary stimulus starts to abate. And when demand levels decline, the tolerance for risk in those asset classes drops along with it.

Therein lies the issue at hand. When monetary policy tightens, it has an immediate negative influence on economic growth, while fiscal-policy improvements take a long time to work their way through the system. So although fiscal-policy improvements are necessary and attractive to the long-term health of the economy, the recent reaction of the stock market on expectations of some immediate positive influence is far too early.

Trade wars hurt companies

 

Furthermore, investors seem to be ignoring the risk associated with Trump’s interest in negotiating better trade deals. The only way he can do this is to threaten a trade war with China and within NAFTA. If he does that, he needs those countries to believe that he is capable, and willing, to initiate a trade war for them to come to the table and renegotiate existing deals, or to make concessions. And that’s the only way he will come out of those negotiations a winner.

The problem is, at least for the stock market, if he makes other countries believe that he is capable of implementing a trade war, the stock market will believe it as well, and trade wars are not healthy for companies’ earnings growth.

We are extremely concerned that the stock market has reacted prematurely and that it is ignoring immediate risks. We recognize that there is monetary stimulus still coming from the European Central Bank, and in our opinion that is the only reason that the stock market is at a high 25 times earnings. Otherwise a material correction would be part of this warning.

$tockMarketDirection proprietary model is currently BULLISH. We strongly encourage you to monitor positions closely, exercise proper money management strategies and follow us at $tockMarketDirection for ALERTS we may issue advising a change in the current market direction. Stay tuned and follow us. If you have a testimonial or comment of how this website has helped you we would like to know, email us. Share with a friend.

The all-time highs since our initial recommendation to go LONG this market. Here is how the markets have performed:

Stock Market Direction Recommendation (11/10/2016)
Dow	up 1,191.75 points a 6.34% gain	1/6/17
Nasdaq	up 355.45 points a 6.82% gain	1/6/17
S&P 500	up 114.62 points a 5.29% gain	1/6/17

Related Link: http://www.stockmarket-direction.com/