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Markets are Set Up for a Fall

Markets are Set Up for a Fall
April 04
11:16 2017

(DR) – I guess we can all use a break now and then, and this seems like one of those weeks when not much is happening.

We had a tumultuous 10-day period from March 14–24, which included a Fed rate hike, Dutch elections, a weaker dollar, a stronger euro, a rally in gold and a nervous stock market in an orderly retreat.

The news cycle was spun up with endless stories about Trump and the Russians, the failed Obamacare repeal vote and a Supreme Court nominee.

Now, suddenly, markets have gone quiet. Stocks, bonds, gold and the dollar are all sliding sideways, while the news cycle is repetitious at best and boring at worst.

On the financial front, this quiet phase may be due to the fact that there is no Fed policy meeting in April, the May meeting looks like a nonevent and the next important Fed meeting is on June 14, a long 11 weeks away.

The Russia story has gone quiet for now as the relevant congressional committees do their investigating behind the scenes. The next big story in Europe is the French election on April 23, but it looks like a foregone conclusion that Emmanuel Macron and Marine Le Pen are easy first-round winners, and the decisive second round is not until May 7. Not much excitement there for now.

Does this mean investors can put their feet up and relax? No, not really.

The current quiet is deceptive, because it masks some powerful forces that will have a significant impact on markets by June.

Now is an excellent time to reallocate away from vulnerable sectors and increase exposure in other sectors that offer attractive entry points.

The Fed is set to raise rates again in June, but it is clearly tightening into weakness. This will slow the U.S. economy, possibly to the point of recession. The Fed will then shift to easing through forward guidance and probably “pause” on the September rate hike as they evaluate weak growth, slower job creation and disinflation.

Meanwhile, on the political front, the United States is descending into what can best be called a second civil war.

This time it’s not North versus South. Now it’s President Trump and a relatively small band of top officials versus Democrats, global elites, mainstream media, mainstream Republicans, the permanent government, holdover Obama appointees, and Obama himself.

This new civil war is not violent or bloody like the first, but the stakes are just as high.

It is being fought over the issues of nationalism versus globalism, secure borders versus open borders, trade, sound money, domestic manufacturing, and so-called progressivism versus tradition.

American politics will remain in this dysfunctional state until either President Trump is politically disabled or his opponents are politically sidelined. This political dysfunction is likely to delay and dilute the impact of tax cuts and infrastructure spending.

Revenue raisers to “pay for” the tax cuts may include a value-added tax (VAT). This will be another drag on growth. Business is delaying investment until tax write-off rules are clarified and avoiding loans until interest tax deduction rules are established. This combination of delayed investment and less borrowing will kill the capital expenditure component of GDP.

Then there is the real possibility of a government shutdown on April 28, when the current “continuing resolution,” or CR, that authorizes government spending expires.

https://dailyreckoning.com/markets-set-fall/

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