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Trump's vicious circle a virtuous circle? Who would have thought?

Peter Switzer
25 November 2016

By Peter Switzer

Donald Trump has set off a surge of positivity, which has seen US stock markets move into all-time high territory. If this can be sustained, it will have a consumer and business confidence effect that will make 2017 look like a damn good year for the economy and stocks.

It surprises me to write this but Donald’s vicious circle that he created for non-believers and the status quo who run America is, day by day, turning into a virtuous circle!

A virtuous circle is a recurring cycle of events, the result of each one being to increase the beneficial effect of the next. For the economy, it’s an economic expansion that would itself produce a virtuous circle of increased productivity, increased investment, increased exports, increased growth and jobs.

The parade of guests on my TV show this week confirms that Donald has arrived and optimism seems to be his surprise travelling companion. And if you need statistical support on this view, we learnt this week that US consumer sentiment rose from 91.6 to 93.8 in November and that’s a solid spike from high levels.

Recall every time, pre-election, that Donald’s polling came close to Hillary Clinton, the stock market sold off but now Wall Street, in particular, can’t get enough of Donald and what he represents for stocks.

Sure, China and other developments such as Japan’s surprise economic growth rate of 2.2% is helping positivity, but plenty of credible commentators are jumping on the Trump bandwagon, if only for economic reasons.

This week on my TV show, four out of four respected economists signed up for a solid economic year ahead.

What the experts say

ANU’s Warwick McKibbin, a former RBA board member who is recognised internationally as an exceptional economist, sees a solid 2017. Similarly, Morgan’s chief economist, Michael Knox, AMP Capital’s Shane Oliver and Perpetual’s Head of Investment Strategy, who can be a hard-nosed pessimist at times, has, with the others, bought a ticket and they’re all on the Trump train!

CMC’s Michael McCarthy, who earlier this year reckoned we’d see the S&P/ASX 200 index at 5900, isn’t backing away from his then big call. And he’s thanking Donald for making it more likely.

The optimism has been contained for a day on Wall Street as it was closed for Thanksgiving, which is THE holiday for Americans. And we can be thankful that the President-elect is playing a different game now he has the gig.

In case you don’t think entrepreneurial leopards can change their spots, have a look at what he has said in his Thanksgiving video to his fellow countrymen: "It's my prayer that on this Thanksgiving we begin to heal our divisions and move forward as one country strengthened by shared purpose and very, very common resolve." 

This very different Donald is at odds with his combative tone pre-election and is even at odds with his tirade of tweets since the poll, which shows some old spots don’t wash off as easily as many of his advisers would love to see.

Right now, a lot of Americans would be sleeping with the benefit of turkey’s tryptophan but let’s hope they rise inspired and positive on what will be Black Friday in the US.

No, Donald hasn’t changed the Julian calendar and it’s not November 13. The day after Thanksgiving is called Black Friday because that’s when US retailers greet a bull-rush of buyers and get out of the red and into the black, as the holiday season of shopping begins.

And it’s often paralleled by the so-called Santa Claus rally, where stocks get into the Christmas spirit.

Business Insider explained the story this way:

“According to the 2016 Stock Trader’s Almanac, since 1969, the Santa Claus rally has yielded positive returns in 34 of the past 45 holiday seasons — the last five trading days of the year and the first two trading days after New Year’s. The average cumulative return over these days is 1.4%, and returns are positive in each of the seven days of the rally, on average. Nevertheless, each year there is at least one day of declines.

Alternative research over a longer period confirms the persistence of these trends: According to historical data going back to 1896, the Dow Jones Industrial Average has gained an average of 1.7% during this seven day trading period, rising 77% of the time.”

So there’s a high incidence of Santa showing up in the chilly weeks of December on Wall Street and given the Donald-created optimism, it would have to be a serious Grinch to take away the Santa Claus rally this year. 

So what could rob us of Santa in four weeks’ time and maybe even ruin Donald’s and our 2017?

Next week, OPEC and non-OPEC oil producers meet in Vienna and if they don’t agree to production cuts, the price of oil would fall and this would generate stock market negativity.

On December 4, the Italians go to a referendum and if the No-vote wins, the PM, Matteo Renzi could resign, which could lead to an election. Then Italy might be asked to say ‘yes’ or ‘no’ to being in the EU.

If you remember pre-Grexit drama and how stock markets responded, if Italy’s exit (or Itexit as I call it) is seriously debated, stocks would fall.

Then on December 15-16, the US central bank is expected to raise interest rates and while expected, rate rises can lead to a stocks’ sell-off. It would be a short-term reaction and may even excite investors on the basis that the Fed’s rate rise says the US economy is going so well it has to have higher interest rates.

Markets will also look at whom Donald appoints as his Secretary of State and his Treasury Secretary. If they’re bad choices, stocks could be dumped. I think good Donald will be helped by winning Donald to stop bad, vindictive Donald coming up with a Christmas-killing decision for the stock market.

I’m not sure Donald has a real philosophy that academics could define accurately but I suspect he has one, which could work out well for investors and those hoping for good economic growth in 2017. 

And “if anything is worth doing, it’s worth doing for money.” Who said money can’t be a virtuous thing?

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