Trump parallels with Iraq

16 January 2017 5:05 pm

Anyone trying to make sense of the markets now should go back to 2003 when the US invaded Iraq.

The markets expected a decisive victory. During the days and weeks when American troops advanced on Baghdad, the market climbed. As they entered Baghdad and marched on the center of the city, the market traded higher and higher. Share prices were just going through the roof.

But after the Americans fastened a rope around the neck of Saddam Hussein’s statue and attached the other end to a tank, and then toppled the statue, stocks started to fall. By the end of the New York trading day, the Standard & Poor’s 500 index had slumped 1.4 per cent.

Why did this happen? Because the market had expected the US would win the war quickly and decisively. The market was buying on that rumour.

But shares started being sold on the news that the war was not simple. And 14 years since, we can see it’s been anything but.

There is a similar pattern with Donald Trump. When he won the November election shares, boomed on the rumour that he would bring in tax cuts, and spend heavily on infrastructure. Donald Trump will be inheriting the second longest bull run on the markets with the US stock market now sitting at a record $US26 trillion. The Dow Jones has been up 8.9 per cent since election day, indicating investors’ expectations of tax cuts and infrastructure spending under Trump.

But Trump has failed to spell that out. And like the war, the Trump presidency will be far messier than the markets expected.

The market is looking forward to a combination of corporate tax cuts, a reduction in individual tax rates, fiscal stimulus and deregulation,” Russ Koesterich, co-manager of investment giant BlackRock’s $41 billion Global Allocation Fund told the Los Angeles Times. “But this is a lot, probably more than any administration can realistically achieve in one year.”

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, is forecasting a 2017 market “melt-up”, saying the jump in US stocks after the election reflects the “Icarus Effect” referring to the Greek mythical character who flew close to the sun on wings of wax and feathers.

He said market melt-ups are followed by market meltdowns as occurred in October 1987.

What we're likely to see is a Trump slump.

So the moral in this story: buy on the rumour and sell on the news.



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