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."

Trump gives Wall Street some gifts before Valentine's day

(February 3) This week the U.S. Dow Jones Index of stock prices had begun to show signs of investor unease with Trump's actions as it dropped back below its record 20,000 but now Trump is delivering on deregulation and the index has again moved over 20,000 today.

While Trump is supposed to be anti-establishment he has many prominent former Wall Street figures in his administration. Since he was president-elect U.S. stock markets have been enjoying what has been called the Trump rally. However, the rally faltered earlier this week. Today it continued its journey upward as Trump began to undo regulations that had been put in place to ensure another financial crisis took place. The restrictions also led to less avenues for banks to make profits. According to Bloomberg: "Among the targets are rules that guard against predatory lenders, force brokers to lower fees for retirees and ban proprietary trading — protections that consumer advocates vowed to defend." Instead of protecting those who voted for him and saw him taking on the power of the big banks to protect their interests, Trump is doing the exact opposite. No doubt he will sing a song about a smaller more efficient government and less red tape creating more jobs and a fatter paycheck as the much bigger pie trickles down more crumbs. There will be no warning about future bubbles and financial crashes.

Lloyd Blankfein CEO of Goldman Sachs Group Inc. and Jamie Dimon of JP Morgan and Chase have long been pushing for changes in the 2010 Dodd Frank Act. They have argued that industry is too constrained by the system. Gary Cohn, the director of the White House National Economic Council and a former Goldman Sachs president said in an interview: “We’re going to attack all aspects of Dodd-Frank.” He said the Trump administration could do quite a bit on its own but would need help from Congress to deal with some parts of the law. For all to see you have the banking establishment at work ensuring that anti-establishment Trump meets the needs and demands of the Wall Street establishment. The House Republicans, led by Jeb Hensarling, Financial Services Committee Chair plan to roll out a bill to replace Dodd-Frank in the coming weeks. The rise of the DJI above the record 20,000 mark was led by Financial Stocks. Goldman Sachs rose 4.3 percent and Morgan Stanley 5.6 percent the largest gain since the day after the U.S. election on November 9.

One aspect of the Dodd-Frank Act is the stress testing mechanism that checks whether banks have sufficient capital to weather an economic downturn. The process is complex but Christopher Wheeler, a bank analyst claims the process has ensured that the system has made the U.S. banking system one of the strongest in the world. He wondered if Trump would tamper with this system.

A likely focus will be the Volcker Rule. Investopedia describes the rule as follows:A federal regulation that prohibits banks from conducting certain investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds, also called covered funds. The Volcker Rule’s purpose is to prevent banks from making certain types of speculative investments that contributed to the 2008 financial crisis.This rule restricts banks from operating in areas where they formerly made large profits. Just to make sure that no one gets the idea that Trump is interested in protecting consumers, he is expected to sign an executive memorandum that will direct the Department of Labor to review and stall the fiduciary rule. This rule set to come into effect in April was supposed to protect millions of retirees from being led into inappropriate investments that would generate larger profits for brokers but are quite risky, according to the Obama administration.

The Trump moves led to an advance in stocks such as that of Lincoln National Corp. Voya Financial, Prudential Financial, Metlfe Inc. and American International Group. The last three were listed as important non-bank financial institutions that could come under some Dodd-Frank restrictions.

A key critic of Trump's moves will be Democratic Senator Elizabeth Warren who claims that Trump will use his power to benefit wealthy friends: “The Wall Street bankers and lobbyists whose greed and recklessness nearly destroyed this country may be toasting each other with champagne, but the American people have not forgotten the 2008 financial crisis — and they will not forget what happened today.”