Trump's Election Is Now Fully Discounted in U.S. Stock Prices!

Just a quick note here regarding Trump's successful return to power as the next President of the United States.

Yesterday, Wednesday, November 6th, U.S. stock prices rose sharply, U.S. Treasury securities fell sharply, and gold and silver prices also fell sharply.

And about halfway through today, the S&P 500 topped out at about +0.75% on the day, the Nasdaq Composite topped out at about +1.5% on the day, and the DJIA and Small Cap stock indices have been flirting with the zero line after monumental gains yesterday. Bond and Precious Metals prices have also bounced modestly so far today.

The Federal Reserve just lowered its Fed Funds rate target by 25 basis points, which was consistent with most Wall Street forecasts.

What now? It looks to me like all the potential positive news relating to Trump's victory is now fully discounted in stocks, bonds, and precious metals prices. 

Bottom line: I believe that U.S. stock prices are now at or very near a major top. I see safety in bonds and precious metals related investments. Elon Musk is likely to accept an invitation from the new Trump administration to be the "Budget Czar" with a potential mandate to cut up to $2 Trillion from the Federal Budget. Musk himself says there will be temporary dislocations (i.e. "Pain") for many Americans during this process, but he says that in the long term most Americans will be better off. I doubt whether most Americans will be better off, but I do believe the "pain" portion of Musk's comments. Consistent with the pain that is surely forthcoming, an economic recession is now likely to begin in the first half of 2025. Forward-looking stock market investors will soon see the early signs of a recession and will exit stocks in earnest over the very near term.

We're not in Kansas Anymore. Or Are We?

In August 2022, voters in Kansas overwhelming rejected a statewide referendum that would have made abortion illegal in Kansas. The final vote was 59% to 41%. What makes this vote so interesting to me is that the polling ahead of this vote was split 50-50! This was a monumental miss for pollsters!!

Why is this important today?

Most of the "fair and balanced" polls currently show Harris tied with Trump in the race for President of the United States. The polls are effectively tied Nationally AND the polls are even effectively tied overall in the 7 major electoral college swing states. 

The key questions that must be asked now are "how good are the polls", is this contest really tied, and does the abortion issue mean as much in the national contest as it did in Kansas in 2022 and other RED states in the two years since? In other words, will there be any significant "crossover" vote among Republican voters because of the abortion issue (or any other Trump-related questionable acts, comments, or policies)? Let's review some relevant polling history.

In 2016, there was an apparent under-sampling of Trump voters in most major polls which resulted in a Trump victory against Hillary Clinton. In 2020, there was still a modest under-sampling of Trump voters, but Joe Biden still managed to win. In 2022, there was a clear under-sampling of Democratic voters as the so-call "Red Wave" never really unfolded and the Democrats managed to hold onto their majority in the Senate and only just barely lost their majority in the House.

Again, why is this important?

I strongly believe that the November 2024 election results will look more like 2022 results as compared to 2016 results. Here's why! Moderate Republicans do not want to admit that they will NOT be voting for Trump. In fact, they may actually vote for Harris. Please keep in mind that every lost Republican vote for Trump is actually a 2-vote swing if he or she "crosses over" and votes for Harris. And it is my view, that many Republican voters who don't want Trump, but can't justify a vote for Harris, may actually stay at home or at least NOT vote for President. If only 2% of Republicans actually vote for Harris instead of Trump (because of 100 different rational reasons), Harris would then win in a landslide, which I now predict!!

The political betting sites (led by Polymarket.com) now show Trump as a 64% probability to win, with Harris just at 36%. Predictit.org shows slightly better odds for Harris, but not by much. Trump is at 59% to win on Predictit, while Harris is only at 44%. Not sure why the total is greater than 100%, but there it is none-the-less (this is not a misprint). It is not hard to speculate that the PolyMarket betting odds are impacting the Predictit betting odds in favor of Trump. Americans are not allowed to place bets on the PolyMarket website where large bets are allowed, but they are allowed to make smaller-size bets up to $850 on the Predictit website, which then creates a minor arbitrage between the two websites. Uninformed very large bets for Trump have recently been placed on the PolyMarket website as compared with less favorable Trump bets from better-informed U.S. speculators that are currently being placed on the Predictit website. However, on balance, all the bets still favor Trump to win.

Please keep in mind that in 2016, Nate Silver's Five Thirty Eight website had Trump's chances of victory at ONLY 29%!! And this probability of a win for Trump at just 29% was actually among the highest of all polling services at that time!

Again, why is this important?

U.S. stock investors appear to be betting big on a Trump victory. I believe that recent record highs in most major stock market indices are discounting a Trump victory and all that comes with it (i.e. lower corporate taxes and more business- friendly Federal regulations for corporations). However, if Harris wins, as I strongly believe will be the case, then equity prices will give up ALL their recent gains and more. The correction in stock prices will probably be greater than 10% if Harris wins. And even if Trump wins, I actually believe there will only be modest upside from here, if any!

Bottom Line: Investors should exit U.S. stocks now or at least reduce their allocation to stocks in a meaningful way! Cash is king!!

Early Xmas Gifts From Donald Trump

Former President Donald Trump is now promising almost a dozen different tax cuts if he is elected President on November 5th. 

Of course, there isn't much talk from the Trump folks regarding how to pay for all these tax cuts. And to add insult to injury, Mr. Trump is proposing massive tariffs on almost everything that is imported into the United States. These across-the-board tariffs would cost U.S. consumers dearly as price inflation on almost everything would be almost impossible to avoid.

Most major U.S. stock indices are now at record all-time highs. It's not hard to speculate that this latest surge in share prices is related to Mr. Trump's recent uptick in the election polls. Who doesn't like the idea of tax cuts? Of course, their negative impact on the Federal deficit would be in the trillions of dollars, and passage through Congress would be unlikely at best.

I believe the American people know political "pandering" when they hear it, and I strongly suspect that Mr. Trump's recent uptick in the polls will be temporary and short-lived.

And if the recent surge in U.S. stock prices is tied in part to Mr. Trump's improved standing the polls, then any setback to his campaign is likely to result in a correction in share prices as well.

Even though oddsmakers are now projecting a Trump victory on November 5th, I continue to believe that Vice President Harris will prevail. I also believe that Democrats will retake the majority in the House of Representatives AND that the current majority in the Senate will remain in the hands of the Democrats. 

In the U.S. financial markets, equity prices look vulnerable to at least a 10% correction while bond prices look reasonable (and a safe place to park idle cash).

U.S. Stock Market at Major Top! - Exit Longs Now!!

The great Marty Zweig once said "don't fight the Fed!" And these words of wisdom have mostly worked well for traders and investors forever, it seems. However, I strongly believe that this time may be different. Now there is a phrase that will get you in a lot of trouble. "This time is different!"

In one of the most telegraphed policy shifts in history, the U.S. Federal Reserve is about to pivot from a relatively tight monetary policy to at least minor accommodation with its first cut in interest rates in several years. Most major U.S. stock market indices are at or near all-time highs and many Wall Street pundits are forecasting even higher prices immediately ahead.

The prospect of lower interest rates combined with the current fever among investors for stocks in the "artificial intelligence" space may be justification for hanging on to U.S. equities here, but I see signs of a "Dot Com - like" exhaustion top.

When the Dot.com stocks topped out in January 2000, the Nasdaq QQQ Index fell 83% over the next 20 months. The Dot.com era was certainly unique, but it's not hard to see signs of the same sort of "irrational exuberance" now.

Investors are counting on the elusive "soft landing" in the U.S. economy and therefore "no recession" and no meaningful correction in stock prices. Truth be told, the current Fed gets high marks for it's policy actions of the last couple of years. However, the Fed may have waited too long to change gears here, and the U.S. and global economies look poised for significant slowdowns that result in growing recession fears. Of course, China is already showing signs of recession which the PBOC seems late in its efforts to stem the tide. 

If you sell stocks here, where can you hide your capital? Intermediate-term U.S. Treasury securities look good to me here, as do precious metals mining stocks.

Nasdaq 100 Index (QQQ) Weekly Chart

S&P 500 Index (SPY) Weekly Chart

Major Gold Miners ETF (GDX) Weekly Chart

The Federal Reserve - Out of the Box Forecasts

In a controversial research report released this past Friday, Apollo Global Management's Partner and renown Chief Economist Torsten Slok said that he now believes that the U.S. Federal Reserve may NOT cut interest rates at all in 2024. To say that this is "out of the box" thinking is an understatement! The consensus view among Wall Street pundits now is for three 1/4-point cuts in the Fed Funds target sometime over the next 10 months probably beginning in May or June 2024. What's even more remarkable about Mr. Slok's forecast is that less than 9 weeks ago, the consensus view was for six 1/4-point cuts in 2024.

Given Mr. Slok's excellent forecasting record and his extraordinary resume, it would be foolish not to at least consider his remarkable view.

Having seriously considered Mr. Slok's forecast here and now, I can write without hesitation that I don't agree with it and I will even make the bold suggestion that the probability that Mr. Slock is correct here is near zero!

Over the last month, New York Community Bank (NYCB) shares have fallen from just over $10/share to near $3/share as exposure to the commercial real estate market seems to have adversely impacted this regional banks balance sheet and its potential profitability. This bank's CEO stepped down late last week and rumors of potential reporting improprieties have surfaced.

It's not a reach here to suggest that given the general weakness in the commercial real estate market nationwide, NYCB's troubles may very well be the tip of the iceberg for regional banks generally.

Here in Chicago, it's not hard to see the evidence first hand. On State Street, Chicago's "Great Street", 50% of the storefronts are now vacant!

While Jamie Diamond at JP Morgan, and others like him, would like managers to return to their cubicles at corporate offices nationally, managers are reticent to cooperate given the COVID-related change in culture to working from home or at least working in some sort of "hybrid" situation (split home and office hours).

To think these problems in the commercial real estate market will disappear quickly is fraught with risk and denies the obvious!

While the current consensus view on three 1/4-point interest rate cuts in 2024 is probably correct, if NYCB's troubles are not isolated to New York, then six 1/4-point cuts could quickly be back on the table for the Federal Reserve to consider.

And one last very important question to consider please: IS THE U.S. FEDERAL RESERVE TRULY AN INDEPENDANT AGENCY? In normal times, the answer may be "YES", but these are not normal times.

If I am right, and if in fact politics are now a factor in the thinking of the Federal Reserve, what do Fed officials really think about the possibility of a 2nd term by Donald Trump. Surely they must know that if elected in November, Mr. Trump will replace the current Chairman of the Federal Reserve and everyone else he can to control this key institution. Given that my premise is right, that politics are now a variable in Federal Reserve monetary policy, then the current Fed will use ANY weakness in the economy (any weakness at all) from here until the election as an excuse to lower interest rates (in order to favor the re-election of Joe Biden)!

For traders and investors, the path forward is simple: Buy gold! Buy Silver! Buy Gold mining shares! Buy Silver mining shares! NOW!!