I Was Wrong... For Now

Written By Briton Ryle

Posted January 25, 2017

I don’t have a problem admitting when I am wrong. Back on January 4, I was mulling over what President Trump’s first actions and their implications would be. After all, stocks have rallied strongly in anticipation of corporate tax cuts. Banks in particular have enjoyed the added catalysts of changes to Dodd-Frank regulations. 

So, I wrote:

The first hundred days in office is the time a new president can run wild. The incoming president has won a “mandate from the people” that should allow him to pass his most important pieces of legislation without too much resistance…

So, what will it be for Trump? This is a really important question if we operate on the assumption that he won’t get everything he wants. Even in a Republican-controlled Congress, he’s going to hit some resistance.

Maybe the fiscal conservatives will balk at the proposed $1 trillion infrastructure spending bill. Maybe it won’t be so easy to simply renegotiate trade deals. And maybe trying to renegotiate deals will spark the trade wars that some people are worried about. 

I don’t know what policies Trump is prioritizing for his first 100 days. I’m pretty sure it won’t be a wall on our border with Mexico. And I’m pretty sure it won’t be Obamacare, either (I hear the GOP is worried that leaving a few million people without health care might hurt their approval ratings)…

The optimist in me wants to see Trump take office and then embark on a measured campaign to enact the easiest policy proposal he has: corporate tax cuts. I do not see much opposition to cutting corporate taxes. The benefits would be near immediate. And one success might lead him directly to the next.

So, it looks like I am wrong about this. Trump is not talking taxes right now. He’s talking about the wall. He is set to restrict immigration. It appears the repeal of at least parts of Obamacare is coming soon. And Trump has pulled America out of the Trans-Pacific Partnership trade deal.

In other words, Trump is not going after the low-hanging policy fruit. He seems set to take on the most difficult of his campaign promises first.

Taking the Hard Way 

A couple weeks ago, I was expecting the market to sell off if Trump decided to take the hard way. It seemed to me that if Trump actually does put off tax reform and starts with Obamacare or trade deals, we’d get a sharp sell-off. 

In fact, a lot of traders were saying they planned to take profits around Inauguration Day. And that’s probably because historically, markets tend to weaken around that time. 

Well, Inauguration Day has come and gone. And Trump seems to be taking the hard way. And the Dow is finally taking out that 20k level. So, what’s going on? 

Well for one, seasonal patterns don’t always work — see “sell in May” over the last five years. I also have to point out that this rally is backed by improving fundamentals…

Bank CEOs have been outright bullish on their businesses for the first time in years. GDP estimates are getting revised higher. Inflation is picking up. The Fed is projecting a slow rise for interest rates. Home sales are improving. And most importantly, earnings are improving. There’s more, but you get the point…

Economic indicators were already improving during the fourth quarter. But Trump’s win really kicked things into overdrive. As we’ve discussed, the potential for corporate tax cuts is a big deal. 

The economy has momentum, which means Trump may well have some time before he has to deliver on taxes. 

What Happens After Dow 20k?

In the early weeks of January, the financial media was obsessed with the Dow Industrials Average hitting the 20,000 level. Day after day, the headlines had some version of Dow 20k in them. And the index would get right there and then sell off. 

As the financial media tends to do, it got bored with that story. The turnout for the inauguration became the big topic. And then the protests on Saturday dominated the coverage. You gotta love the irony: the minute the media abandoned the story, the Dow took off to the upside. 

Yesterday, I told my colleague Christian DeHaemer that the Dow would take out 20k today. I also told my Real Income Trader readers to buy some call options on Alibaba (NYSE: BABA) to take advantage of the imminent surge for stocks: 

I don’t have any problem being wrong about the market’s next move. If you read yesterday’s Real Income Trader Weekly #78, you know I said I thought the market was poised for a downside move. (As an aside, you should always read every alert, regardless of which strategy you are using, because I will typically share my thoughts on direction in each alert.)

Of course, I did acknowledge that there is an upside case as well. And it now looks as though the market is choosing the upside. Dow 20k looks imminent, and it will likely move higher from there. Maybe around 300 points. So we’re gonna get some Alibaba calls (NYSE: BABA). 

Alibaba reported great earnings last night. The CEO has already met with Trump, so it gets the stamp of approval. And finally, options premiums have collapsed post-earnings, so we can get positioned relatively cheaply.

Those Alibaba call have just about doubled in price overnight. And the rule of big round numbers says that the Dow is going to go higher before there is any noticeable selling. Yeah, I told my Real Income Trader readers we might see 20,300 on the Dow, but I might be wrong; we could see a lot more than that. Don’t be surprised if the Dow hits 21k over the next couple of weeks.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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