Many investment classes move in cycles.
One pretty simple cycle is the calendar cycle for the stock market. Stocks tend to rally to start the year, move lazily in the spring, hold steady over the summer, and have a big decline going into the autumn, then end the year strongly.
That’s why you end up with sayings like “Sell in May and go away.” It’s a saying that follows the cycle.
Of course, a pattern like this one won’t always play out as expected every single time. Last year’s big market selloffs occurred during times that are historically more favorable for markets to rally.
But that’s because there’s more than one pattern that can play out in markets. In fact, we’re in the midst of this pattern right now.
I call it the “PTC” pattern. It’s short for “Presidential Tweet Cycle.”
You see, over the past few years, we’ve seen a cycle play out that’s unlike any other past cycle. That’s because it’s based in part on President Donald Trump’s tweets.
When Trump starts tweeting about the stock market being at all-time highs, in short, it’s time to hedge. Because once that happens, the next step in the cycle is cheerleader Trump shifting to his self-described “Tariff Man” mode.
We saw that start to play out last week with a series of tweets on ongoing negotiations with China. Dismayed that the Chinese may be trying to drag negotiations out past the 2020 election, Trump decided to start hiking tariffs at the end of Friday.
That’s added a lot of uncertainty to the stock market—and the market hates uncertainty more than anything else. After all, the economy was pretty weak in 2009-2012, but it rallied hard on the certainty of zero percent interest rates set by the Federal Reserve.
(In fact, this seven-year hold on interest rates at zero percent may have been so strong that we could be just halfway through a multi-decade market rally. That would be similar to how stocks rallied from 1980-2000 as inflation and tax rates fell, and new technologies caused a surge in productivity. But more on that in future blogs.)
It’s hard to tell where the tariff tiff will end. It never seems to, at least permanently. We’ve seen this PTC play out a few times already.
Is this time different? It may be. The rhetoric seems to ratchet up a bit each time this cycle plays out.
Worst case scenario, we go back to the Smoot-Hawley tariff era of the 1930’s, which, as anyone who has watched “Ferris Bueller’s Day Off” can tell you, helped in part to exacerbate the Great Depression.
The more likely scenario, however, is that it may also simply lead to another market pullback, and the increased market volatility we’ve been seeing this week continues for a few weeks or even a few months.
During negotiations and even in some tweets, President Trump has made it clear that he’d prefer eliminating all tariffs and starting fresh rather than go through the cycle we’re seeing now. That also separates Trump from the convoy of clown cars laden with 2020 Presidential contenders. He’s willing to act tough to get a better deal later, rather than accept the status quo.
Finally, to put this selloff in some perspective: Given the strong market performance we’ve seen year-to-date (technically Dec. 26 of last year), some kind of a pullback was in the cards.
That’s why in recent weeks, I’ve been taking profits on many of the options trades I’ve made for myself, my investors, and my subscribers over the past few months—they’ve rallied hard, and were due to either slow down at best, or pull back at worst.
If you’re overly bullish or leveraged, this would be a good time to deleverage by taking your riskiest and most volatile positions off the table. Build a watch list of quality names to buy on a bigger pullback. You don’t need to cash out and stuff it under the mattress, just be aware that risk goes both ways, and in markets like this, a position going the wrong way at the wrong time can be devastating.
So far, traditional fear metrics aren’t out in full force yet indicating a big, bad, bear market.
Market volatility is rising, but it isn’t at elevated levels that would indicate that stocks have sold off too much. Gold prices, a barometer of fear, have been languishing, with the metal starting to move back to around $1,300 per ounce, but not quite making it. The PTC tells us that there could be some bigger fears ahead.
The only area that’s had a strong move recently as stocks have stalled is the cryptocurrency space. That space had an 80 percent peak-to-trough pullback between late 2017 and early 2019, so part of that rally is simply moving off oversold levels. Even with today’s decline, cryptocurrencies have been heading strongly up in the past month.
Why? This could become a safe niche for investors looking to get away from trade war fears, particularly where countries like China and the United States have currencies to defend. Gosh, if only someone had told you in the past few months that cryptocurrencies were looking attractive right now!
If anything, we’re in a wait-and-see market right now. For most positions, that’s fine. Collect your covered call premiums. Collect your dividends. The market’s losses, if they continue, can become our gains.
But for where we’re at in the Presidential Tweet Cycle, caution is warranted. And, while I’d like call it the Trump Tweet Cycle specifically, here’s a chilling thought: Future presidents may take market-spooking social media posts to whole new levels!
Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.
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