Trump rally pauses as investors uncertain about future

(February 6) The U.S. markets have pulled back slightly today from the renewed Trump surge on Friday. However, the political furor over Trump moves such as his travel ban seem to be offset by positive expectations of Trump policies with respect to business.

Trump's recent move to change Dodd-Frank regulations on financial institutions was obviously a plus for markets. The Dow Jones average was still above the 20,000 level at 20,045.87 down just 25.59. So far, the political uncertainty and protests caused by Trump policies have not outweighed positive expectations for the future as indicated by market movements.

There are some signs that markets could turn down soon. Bloomberg data shows that the number of articles that contain the word "uncertainy" has reached a record. No doubt Trump can dismiss this as more fake news. However, investors could very well become uneasy if this view that things are uncertain persists. One would think that with such uncertainty the Chicago Board of Options Exchange Volatility index or VIX would be surging higher. It is not. Quite the opposite it has been unusually calm. Yet the Global Economic Policy Index a measure of disquiet among policymakers and politicians is the highest on record.

Another measure that gives a hint of danger is the CBOE Skew Index. This index measures the cost of buying protection against dramatic moves in the S & P 500 index. This index shows that investors are concerned about risks. Another sign that all is not well is that there is a lot of money going into gold and gold stocks. Barnaby Martin, of Bank of American Corp., wrote to investors: “While stocks and corporate bonds have rallied year-to-date, we see a very incongruous kind of calm in the markets at present. Note, that while equity volatility is still hovering around record lows, inflows into gold funds year-to-date in Europe have surged.”

Chris Flanagan also of the Bank of America says that a combination of rising yields and rising gold prices signals market volatility will soon rise. Rising benchmark bond yields together with rising gold prices have happened before previous market drops in 1973-4 and Black Monday in 1987. Further signs for a drop in the longer term are given in a recent article by Nouriel Roubini, Dr. Doom.

In Canada, even though stocks were down overall, many gold stocks rose with Barrick Gold rising 1.4 percent and Agnico Eagle up 1.3 percent to $64.97. The price of gold hit its highest level in three months as worries about the U.S. political landscape and the low loonie led to more investor interest in the metal. The financials group continue to gain slightly with bond yields rising after Trump on Friday promised to ease banking regulations. However, oil prices dropped as US supplies appeared ample and this outweighed OPEC output curbs and U.S. Iranian tensions.

The slight drop in U.S. markets may in part be the result of uncertainty over Trump policies while there was no major new economic data to move the markets. Nearly a hundred companies including Alphabet (Google), Apple, and FJacebook have banded together to present a legal brief that opposes the ban. Goldman Sachs economist, Alec Philips said that although Trump tax cuts and infrastructure funding could fuel growth his restrictions on trade and immigration could negate their positive effects. Adam Sarhan, CEO of 50 Park Investments said: "Investors are in a wait-and-see mode and are looking for the next bullish catalyst to send the market higher. There are concerns regarding the backlash against any protectionist policies that come out of Washington and other countries and investors are seeking clarity."