Inauguration day will mark a big turning point in the stock market
Was anybody here trading in 2003?
It was the year we invaded Iraq (regrettably). The markets were expecting a decisive victory. During the days and weeks when American troops advanced on Baghdad, the market climbed. As they entered Baghdad and marched on the center of the city, the market traded higher and higher.
Finally, American troops fastened a rope around the neck of Saddam Hussein’s statue and attached the other end to a tank. The world watched on television as the tank backed down and toppled the statue.
And at that very moment—stocks started to fall.
The rumor was that the US would win the war quickly and decisively.
The fact or news was that the war itself turned out to be the simplest part—and the 14 years since have been anything but.
Can you see the parallels with what has been going on recently?
Stage 1: The prospect of war/a Trump presidency is scary: stocks go down.
Stage 2: Once war/the Trump presidency commences, people see the positive aspects of it.
Stage 3: The reality of war/the Trump presidency proves to be far messier than anyone anticipated.
One could make the argument that Brexit has just entered Stage 3.
This pattern is played out over and over again in financial markets. Year after year after year. (I discussed this a lot in my free publication, The 10th Man. Subscribe here)
The stock market on Inauguration Day
I think that Inauguration Day (January 20) will mark a big turning point in the stock market. Stocks could be headed for a dirtnap.
There is historical precedent: see what happened to stocks after Reagan’s inauguration.
Right now, stocks are pricing in the most pro-business administration since Reagan, or possibly ever. The market is up. Sectors that benefit from deregulation are up even more. Bond yields are up. It's the Trump trade.
On January 20, the reality begins.
Let’s get real about a Trump presidency
The reality is that Republicans do not have 60 votes in the Senate, so getting things done like tax cuts is going to require some horse trading.
Trump does have leverage—lots of Democrats are up for reelection in the Senate next year, and many of them from states where Trump won big. It should not be hard to peel some of them off.
But that is where the horse trading comes in. Will Trump get the tax rates he wants? Probably not.
Will Trump get a full repeal of Dodd-Frank? Probably not.
What we end up with will definitely be better than what we had before, but in my opinion, the market has every bit of Trump’s proposed agenda priced in.
So just like after US troops pulled down the statue and the reality of governing Iraq set in, once Trump is sworn in, the reality of trying to get this stuff through Congress is going to set in.
In fact, I’d be surprised if the top tick isn’t when Trump says: “I do solemnly swear…”
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