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Is there something scarier than Donald Trump out there?

Peter Switzer
3 June 2016

By Peter Switzer

There are a lot of scary possibilities out there explaining why our stock market has had two down days in a row, where we’ve given up 148 points from the high this week of 5427. And I’m not sure if this negativity has factored in the possibility that Donald Trump and Vladimir Putin could soon be head-to-head leading the two nuclear super powers of the world!

It kind of makes you content that the China leadership looks so much more traditional and predictable!

What is ironic about this first sizeable market sell off, which on my figures above is around 2.7%, is that the negativity started when we got good economic news during the week.

That 1.1% economic growth number for the March quarter made a lot of market players conclude that maybe the rate cuts from the Reserve Bank are going to be less, delayed or even over. 

If rates aren’t going lower, that hurts stocks. However, if the economy is stronger than expected, then stocks should get a boost, but growth takes time to translate to profits and then share prices.

So what else scary is out there to encourage a sell off of stocks? Try these:

  • The exit of  Britain from the EU (or so-called Brexit), which happens or doesn't happen after the vote on June 23. Uncertainty of what happens if the Poms exit has to spook stock markets.
  • The upcoming Fed interest rate decision on June 15 could hurt stocks, even though the Yanks seem ready to accept the second rise, since they lived with virtual zero official interest rates. I think the central bank could wait until July to get the Brexit vote out of the way but, again, uncertainty prevails and this is never great for stocks.
  • Other central banks (such as the European Central Bank) and what they can come out with can rattle markets. The ECB met and communicated overnight and pushed its growth and inflation forecasts higher, which actually were good things. However, in the world of negative interest rates, market panic could only be a few sleeps away. This ‘who knows?’ factor on so many fronts is preventing stocks going higher right now .
  • OPEC is always a worry and what it can do to oil prices and rising prices has been good for stock prices, despite what your economics education might have made you think. Overnight in Vienna, OPEC failed to reach a production agreement but who’s surprised with the team that makes up the oil cartel?
  • The political uncertainty linked to Donald Trump isn’t a plus for stocks but the ordinary electioneering from Hilary Clinton, who seems to be having trouble beating Larry David-lookalike and ‘sound-alike,’ Bernie Sanders, is making a Trump presidency more possible. The betting agencies had him at $3.50 a couple of weeks ago but he now is $2.75 and Hilary is $1.50, after being $1.24!
  • Markets are in the hands of crucial economic data with US payrolls or job figures out on Friday night our time and these could play with Wall Street’s collective trading mind. A very good number might put a June rate hike on the agenda, big time. Stocks could go for a big slide just because the reality of another rate rise plays to a new unknown for the US economy.
  • The old saying “sell in May and go away, come back on St. Legers Day” (which is around mid-September) didn’t work out this May, with stocks up over 2% for the month, but June is the big, bad month for stocks on a historical basis.
  • Locally, we have another month of election campaigning. And while I don’t think the promises of Bill Shorten and Malcolm Turnbull have hurt stocks, they certainly haven’t helped.

Labor’s negative gearing and capital gains tax changes aren’t helpful to growth and stock prices, nor are Government’s proposed changes to super. That said, Labor’s negative gearing changes could make the stock market more attractive compared to the property.

Now I’ve left out smaller scarier issues, such as China and the South China Sea geopolitical risks, North Korea, a Chinese bank debt implosion and so on. However, when you look at all these and throw in the possibility that we’ll have to take Donald Trump seriously as the next US President, then it makes total sense that stock players are taking profits off the table, after a near 15% gain for stocks in Australia since February 10.

One final and optimistic point, as I couldn’t commit to total negativity. I didn’t include one of the big triggers for the January-February stocks dramatic dumping and that was the fear that the US was heading into recession. That big negative is off the table and that huge positive has to be a great thing for stocks for the months ahead, after we deal with some of the currently scary issues out there, including the thought of a Trump-Putin meeting. Of course, anyone who has seen the Kevin Spacey House of Cards TV program knows how that will play out! Maybe it’s time to focus on Donald’s first lady? Could she be a Claire Underwood in the making?

I doubt it.

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