Sentiment Speaks: Trump-onomics One Year Later

A little over one year ago, most of you were expecting Hillary to win the Presidential election, and the stock market to rally.  Well, you got one thing right.  Actually, not really.

If you remember back before the election, many were certain that the world would come to an end if Donald Trump won the election.  In fact, many of you were so certain of this that you expected that the stock market would crash upon a Trump win.

Well, here we are with the benefit of hindsight, and the S&P500 has rallied over 20% since Trump won the election.  How can this be?  How could so many have gotten this so wrong?

It seems that the country is still quite divided, at least based upon the election results, especially when you consider that Hillary won the popular vote.  That means that, purely based upon the numbers, Hillary had more votes than Mr. Trump.  However, since our election system is based upon the Electoral College, we now have a President Trump.

But, how is it possible that so many got the direction of the stock market so wrong based upon their expectation of the election results?   I mean, don’t most of you believe that politics have a huge impact upon the market?  Are you not all discussing, in great detail, about how tax reform will impact the market?

Could it be that Republicans are more wealthy than Democrats and they are the ones who have been buying up the market?   Could it be that President Trump’s millionaire and billionaire friends are the ones who have bid up the market?  Or, could it be that people in general really don’t understand how the stock market works?

Well, for those that have read me for years, you know what is coming.  My answer is most just don’t understand how the stock market works.  In fact, none of what was argued about before the election mattered.  No, not one iota.  Just like it does not matter what happens with tax reform. 

This sounds like blasphemy, right?  But, remember you were even more certain that Brexit, and Frexit, and rising interest rates, and the Trump election, and a dozen other things would have stopped this market rally in its tracks.  So, at what point do you actually begin to question what you think you know about the market?   Could it be that the market really does not care about all the things you were lead to believe drives the market?  Could it be that something much less obvious is what drives the market?

Well, I have personally learned my lesson long ago, and have found myself on the correct side of most market moves for learning that lesson.  In fact, we were looking for the market to strike a bottom days before the election, and warning that we were set up to rally to our next long term target region between 2537-2611SPX.  Yes, we were calling for 20%+ rally in the stock market, and, more importantly, we expected this rally no matter who won the election. 

And, as for those who still think that exogenous events such as who will be the new leader of the free world matter for the stock market, well, as Bill Murray chanted in Meatballs, “it just doesn’t matter.”

You see, R. N. Elliott discovered this perspective about the stock market almost a century ago.

In an essay published by Elliot on October 1, 1940, he opened with:

“Civilization rests upon change.   This change is cyclical in origin and characteristics.  A rhythmic series of extreme changes constitutes a cycle.  When a cycle has been completed, another cycle is started.  The rhythm of the new cycle will be the same as that of the previous cycle, although the extent and duration may vary.  The cycle progresses in accordance with the natural law of movement.”

The first chapter of The Wave Principle further summarized Elliott’s perspective as follows:

No truth meets more general acceptance than that the universe is ruled by law.  Without law, it is self-evident there would be chaos, and where chaos is, nothing is . . . Man is no less a natural object than the sun or the moon, and his actions, too, in their metrical occurrence, are subject to analysis . . . Very extensive research in connection with  . .  human activities indicates that practically all developments which result from our social-economic processes follow a law that causes them to repeat themselves in similar and constantly recurring serials of waves or impulses of definite number and pattern. . .  The stock market illustrates the wave impulse common to social-economic activity . . . It has its law, just as is true of other things throughout the universe.

So, Elliott recognized that life, as we know it, is cyclical, and constantly rhymes, if not repeats. But, Elliott went so far as to question the causes of these cycles, and has actually turned the common conception of “causation” on its head:

“The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle.  This fundamental law cannot be subverted or set aside by statutes or restrictions.  Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.” 

In fact, Elliott even went so far as to state that “[a]t best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.”  In effect, what Elliott is saying is that news does not “cause” the cycles, as most believe.  Rather, news falls within the cycles.  While this clearly challenges the common perception of what moves markets, I would suggest that all those reading my words at least open their minds to this possibility, and it may very well change the way you invest forever.

So, it really did not matter who won the election.  The election event simply acted as a catalyst which ignited this rally, yet the substance of what occurred in the election really did not matter.  And, the fact that Donald Trump won the election and we are now at our target one year later should provide support for this perspective.  Not only did we get the direction of the market correct despite the commonly held pre-election expectations to the contrary, the market has now rallied to our next long-term target region, 20% higher, and we now find ourselves consolidating right below the upper end of our 2537-2611 target we presented to our followers back in 2015. 

Is it time for a direction change?  I will let you know after I review the tax reform bill. (smile)