US large cap stocks will continue to be only somewhat resilient over the next few weeks. Stock prices will be choppy and may, as I mentioned in a prior comment, experience abrupt declines within a longer-term trend of higher resilience and likely higher prices. Longer-term investors may not be able to take advantage of any declines, while investors willing to trade frequently may be able to benefit from the short-term market moves.
The most interesting upcoming dynamic right now appears to be in the bond markets. I expect the resilience of the 30-year Treasury bond future (US1) to decline more dramatically in the next few weeks. With less resilience, prices are likely to move lower. The same is likely to be true for the 10-year Treasury bond future (TY1).
Trump Rally – Not Accurate
The recent stock market rally has been called a Trump Rally. However, based on the shifts in market resilience that I measure, this is not accurate. We are still experiencing trends in major markets established before the US presidential election. The Market Resilience Index (MRI) ratings are completely systematic and don’t assess political events directly. The MRI ratings anticipated a rally before the election, when many were expecting a Clinton victory.
For the most part, prices are moving in line with their levels of resilience. US large cap stocks are continuing a trend toward higher resilience that began in early 2016. The price movements since then have been consistent with a rhythmic shift of resilience on an upward trend. In addition, the market does not appear overly euphoric.
A shift in resilience that began in late September 2016 favoring inflation-linked bonds over nominal bonds (globally) is continuing. Price movements since then have been consistent with the rhythmic shifts expected of the higher relative resilience of inflation-linked bonds.
The 30y Treasury bond reached peak resilience in early July 2016. The 10y Treasury bond reached peak resilience in late August 2016. The price movements since those times have been consistent with the rhythmic decreasing levels of resilience for both markets.
It is not appropriate to link the rally directly to Trump, and it is not appropriate to link the current choppy stock market to him either. Had Clinton been elected, we would be experiencing a similar pattern. The magnitudes might have been different between the two, but the timing would have been similar.
Therefore… Not a Trump Dip
Based on market resilience, the stock market is more vulnerable now and will react more harshly to negative news than it would have 6 or 8 weeks ago. If the market drops over the next four to six weeks, and it appears to be correlated with something Trump does or says, be skeptical — it is not a Trump dip or a market verdict on the news of the day. When the market rebounds a few weeks later, be skeptical of pundits who say that some course has been corrected.
Of course, the market will sell off on calamitous events like earthquakes, some political events, surprise actions by the Fed, and other shocks. However, movement that is often attributed to news events is more a function of changing market resilience than the news itself.