All major indices closed higher on Monday, but the composition of the market changed dramatically into the close.
The market was within the Dow points, trading well above 300 points until a one-two punch. It was really more like a jab, and then an overhand right hook.
The Jab
The Congressional Budget Office (CBO) report currently sees a 2018 deficit of $804 billion, up $139 billion from the 2017 deficit. From there, deficits climb each year:
- 2019 -$1.0 trillion
- 2020 -$1.1 trillion
- 2021 -$1.3 trillion
The flip side is that the economic growth is now modeled better than before.
2018
- Gross Domestic Product (GDP): 3.3%
- Unemployment Rate: 3.8%
- Average Monthly Payrolls: 211,000
Tax cuts were always a double-edged sword for the administration, which believes supply-side economics will generate a faster economic growth needed to curb deficits and reduce debt. It’s clear from the CBO report that is the case, but since the tax plan was introduced, Washington passed that $1.3 trillion spending bill that has dramatically changed even the most optimistic outlooks.
The Hook
The CBO news slowed the rally, but reports of raids on Donald Trump’s lawyer Michael Cohen’s office and hotel room sent everyone scurrying for the exits. It remains to be seen if this is a desperate move on the part of Robert Mueller or what it even means for the president.
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Initial reports say the evidence taken was mostly associated with payments made to porn actress Stormy Daniels.
I’ve talked about the notion of a constitutional crisis knocking the wind out of the market in the past. This isn’t that, but it’s a bombshell that will stir the mass media speculation that influences the market. Individual investors have already rapidly become bearish.
Coming into 2018, bullishness was at its highest level since December 2010, and bearishness was at the lowest level since April 2004.
Contrarians should feel great now because sentiment has completely flipped since.
I continue to say that you should focus on fundamentals, not nonfinancial headlines.
Today’s Session
The market is looking higher on concessions by President Xi of China. During his 40-minute address, Xi reiterated his goal of China being a partner committed to international trade order. He has made these kinds of remarks in the past, but the fact of the matter is, China understands it must play within certain norms as it works to take over the top spot in the global economic pecking order.
Interestingly, he also mentioned the “cold war” and “zero sum” mentality in reference to President Trump’s approach to publicly challenging China on trade, conflating demands for free and fair trade as an affront to a “world aspiring for peace and development.”
I think this is a huge win for President Trump, which means the street will play it down as the establishment is loath to give him any credit even when it moves the needle in favor of all Americans. Let’s see what “news” develops into the close.
That said, I remain very confident on the market based on strong fundamentals that will be the building blocks for the economy.
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