Trump Rally May Se Slowing Down

The Trump Rally has run too far in our view, and the realization may be setting in as the inauguration is three weeks away. The WSJ has an article today pointing out many of his ‘promises’ may be difficult to achieve in the magnitude investors have grown to believe. Tax cuts at levels he has tweeted are likely unrealistic in their amounts and huge infrastructure spending are going to run into some opposition from deficit hawks. Trade re-dos won’t happen as rapidly as markets believe. Once he gets into the White House the reality of politics will engage – it is not over as markets are believing.

It has been about the banks that have pulled most all other sectors higher. Consumer confidence yesterday, off the charts in enthusiasm, betting on increased income and lower taxes. None of those are easily accomplished even with Republications in total control. We are on the band wagon for better times ahead but it has been too much too rapidly; the stock market is ripe for increased volatility beginning as soon as next week after the holiday euphoria concludes. 2017 will be a good year, better than the last three years but our question is, how long will it take to achieve all the goals markets are currently betting on? An analysis of economic metrics paints a picture of an economy finding solid footing after the financial crisis. Unemployment stands at a nine-year low, the S&P 500 continues to break records, and home sales hit their highest rate since 2007. PS: do not sell your stocks.

The only economic data today was November NAR pending home sales - pending sales are defined as signed contracts but have not yet closed. It was expected to be positive, but was not a what was expected.  Not good but do not blame it on rates increasing.  Yes, it was an issue but these are November numbers before interest rates began to spike. The initial reaction to the weakness is supporting MBS prices.

Currently, at 11:00AM, this news has shown a positive 20BPS on MBSs, and the 10yr is down to 2.54%. At Noon, Treasury will sell $34B of 5yr notes.  Yesterday’s 2yr auction did not meet with very good demand.

All things point to a strong economy in 2017.  The Fed watching closely, if growth increases at the pace markets currently think the Fed will move more quickly to increase rates. Markets still thinking three increases spread across the year. Crude oil on the move higher taking other commodity prices with it, an inflation concern. The possible increase in the US debt growth also a huge inflationary concern. The higher US rates go the worse it is going to be for emerging markets and China as their respective currencies fall forcing problems re-paying their debts and capital flight. Europe is being swept aside for the moment, won’t last long though as Brexit will revive concerns. The EU is not as solid as most presently believe; Italy, Spain, Greece and others increasingly leaning back to populism and away from globalization as is the US. Recent elections here and in the EU hint at the end of globalization and toward the middle class; that will become a key in 2017 for markets.