Let's put politics aside, for a moment, and look at the facts. Markets liked what they heard last night from President Donald Trump.
Asian markets reacted favorably overnight, European markets are up nicely this morning, commodities prices are rising, and U.S. stock futures (pre-open) point to another round of record all-time highs.
But politics are the bump in the road ahead.
After an "America First" speech, painted in conservative, Republican overtones, the President and his administration face a deeply divided Congress.
If markets are going to continue to rally, they'll have to withstand U.S. and global political fires, the flames of which are only just beginning to be fanned.
Here's what's really pushing markets higher, and what to expect on the horizon...
Divided States of America
U.S. markets have been on a tear since the unexpected election of Donald Trump.
The President's speech last night to a joint session of Congress is exactly why.
In this speech, President Trump reiterated his campaign promises to "restart the engine of the American economy" by making it easy to start businesses here and making it hard for the businesses here to leave. He confirmed his promise to significantly lower corporate taxes, and for the first time, sounded like he would marry middle class tax cuts to corporate cuts. He addressed his administration's push for "free and fair" trade. And, last but not least, the President called for a trillion dollar "national rebuilding" effort financed by public and private investment.
It's those promises of deregulation, hints of border tariff on imports, tax cuts, and potential for infrastructure spending that has lit a fire under U.S. stocks.
Executive orders aside, the President's big plans are still only promises. If U.S. equities are going to continue to rally, promises will have to turn into policies enacted by Congress.
It's no secret that the Democrats have a visceral disdain for Donald Trump, and their constituents are still holding onto their battered and bruised feelings over losing an election they thought was a foregone conclusion. There's going to be a lot of pushback on the President, his administration, his promises, and his proposed policies by almost all Democrats.
One incident last night in the House chamber says it all. Here's how Town & Country reported it.
Every year of his 29-year tenure, New York congressman Eliot Engel has stood in the aisle of the House chamber to shake the President's hand during the joint Congressional address. It didn't matter which party the commander-in-chief represented, Engel, a Jewish Democrat representing New York's 16th district, which contains parts of Bronx and Westchester County, was there to greet him.
But not this year.
"I've decided not to stand on the aisle of the House chamber to shake the President's hand during this joint session of Congress as I have done in the past through Democratic and Republican administrations alike," Engel said on the House floor. "This will be the first time during my 29 years in the House that I have made this decision."
Engel said that his reasons for breaking tradition include Trump's resistance to working with Congress on issues such as Russia's interference in the 2016 election. He also said, "I have deep respect for the presidency, and I will attend the joint session, but that respect between branches must be mutual. The president has attacked the free press by calling the enemy of the people. He's rejected America's traditional role of welcoming refugees which helped to make our country great. He's cozied up to Putin. He's moved to gut the Affordable Care Act, and looked the other way when threats against the Jewish community have increased.
Engel's disdain for the President, in refusing to even shake his hand, is how a lot of Democrats and their constituents feel. Given that lack of diplomacy, it's unlikely this administration will be able to turn its promises into policies without a thousand cuts.
That is the biggest domestic issue facing U.S. markets.
Globally, it's politics, politics and more politics.
A Disintegrating EU
Both U.S. and global markets, which have mutually enjoyed the Trump Rally, now face political upheavals everywhere.
On March 15, the world will be watching the Netherlands possibly voting to "Nexit." Dutch politician Geert Wilders has vowed to withdraw the Netherlands from the EU if his Party for Freedom (PVV) wins. With the PVV running ahead of Dutch Prime Minister Mark Rutte, a victory is more than possible. Wilders (a defender of free speech who says he's a victim of political correctness run amok) is staunchly anti-Islam and anti-immigration.
Then, there's a possible Frexit. France's first round of voting is April 23 and its second round on May 7, 2017. Marine Le Pen, the leader of France's far-right Nationalist Front, looks increasingly likely to be one of the two candidates to make it to the election's runoff round. A Le Pen victory would inspire far-right parties across the Eurozone, and would likely leave Germany's Chancellor Angela Merkel as the only European leader cheerleading a unified Europe.
Speaking of Angela Merkel, Germany's Federal Elections are on October 22. Merkel, who's been on the job for 11 years, is running for a fourth term. She's fought the Eurozone's debt crisis with Germany's promises of financial backing and welcomed more than one million refugees into Germany, putting her in the crosshairs of the Alternative for Germany Party, a right-wing, anti-immigrant, anti-Islam, Eurosceptic party. If Merkel loses, it's probably the end of the European Union.
As much as the markets would like to forget about politics and get on with production, consumption, and earnings... there's no separating economics and politics. And that means the markets. All of them.
As long as the hot coals of politics haven't yet burst into open conflagrations, investors should stay the course, remain substantially invested, yet be prepared for political eruptions on every horizon.
The post Here's What National and Global Politics Have in Store for Our Rally appeared first on Wall Street Insights & Indictments.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
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