PDSnet Articles

Trump’s Debt Stand-off

At the time of the previous article we said that we thought that the S&P500 index had found some support at its “triple bottom” at 2632 – we were wrong. Consider the chart:

S&P500 Index August to December 2018 – Chart by ShareFriend Pro

The triple bottom was broken decisively and this resulted in severe investor disappointment. At the time of writing, the S&P has fallen for 7 straight days and reached a low of 2351.

This means that it has now fallen 19,76% from its record high of 2930 made on 20-9-2018 – which takes it dangerously close to a technical bear trend (anything above 20%). There is no especially good reason for a 20% decline or more to be considered a bear trend – but that is the convention.

There are three points that make this December collapse notable:

  1. Normally, December is a good month for stocks. It is extraordinary for December to be a down month – and we cannot recall another December which saw this type of fall.
  2. December is typically characterised by low volumes traded, because most investors and traders are on holiday. Volumes can be down by half or more, especially in the week before Christmas and between Christmas and New Year. This implies that the fall we are seeing represents only a fraction of the investing public’s opinion.
  3. None of the other markets appear to be following Wall Street down. Since the 2970 cycle high on 3rd December, the S&P has fallen by 15,7%. Over the same time period, the FTSE is down only 5,3% while the JSE is actually up.

The fact that other markets are not falling tells us that what is happening to Wall Street is a local rather than a global phenomenon – and it is one which the investors of the world do not really believe will be enduring. It also implies that the downtrend does not really represent any sharp change in investors’ long-term perceptions of the American economy.

The immediate causes of the downtrend appear to be Donald Trump’s tweets on the subject of the Federal Reserve Bank governor and his treasury secretary’s efforts to reassure the markets that the banking system in America is not in any sort of liquidity crisis. Both communications were interpreted negatively by that portion of the market that had not gone on holiday.

There seems to be little doubt that the American economy is still booming. The S&P500 companies are still producing record high profits and unemployment is at record lows and average wages are increasing in real terms. So the only other negative in the real economy is the 0,25% increase in interest rates passed by the Monetary Policy Committee (MPC) at their meeting – which was widely expected and had certainly already been discounted into share prices.

And then, of course, there is all the drama and media hype surrounding the stand-off between the democrats and the Trump administration over the government shut-down and extending the government’s debt ceiling.

This has become a political football with both sides blaming the other for the shut-down (which is quite normal). Trump wants $5bn to build his wall and the democrats are pointing out that he has always said that the Mexicans would pay for it. It appears that Trump will eventually have to back down – but whichever way it goes we do not see the shut-down persisting long into the new year. We believe that the matter will be resolved early in January.

Once all investors are back from holiday and the government shut-down is resolved, we expect markets to bounce strongly on bargain-hunting. So we anticipate a “V bottom” on the S&P in the new year.



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