What Could Derail the Trump Train


All good things come to an end. Even Joe DiMaggio’s epic hitting streak, a record that has endured for 75 years, ended at 56 straight games.

The Dow Jones Industrial Average struggled all day Friday but managed to close up a bit to continue an 11-day winning streak. It and other major averages hover near their all-time highs.

I’ve written that President Donald Trump’s big plans to slash regulations, cut individual and business taxes, and build YUGE infrastructure projects have given stocks a second wind after the market spent months digesting 200%+ gains since March 2009 as the election loomed.

But the Standard & Poor’s 500 index has added more than 500 points (29%) since last February’s lows and 10% since Election Day.  The CBOE Volatility Index (VIX) sits below 12, while institutional sentiment is very, very bullish. There appear to be pockets of complacency, if not euphoria.

What could knock this market off its rocket-like trajectory?

Here are the factors and the probabilities I assign to their happening:

  1. Economic recession.  An upcoming recession is often the catalyst for big corrections or bear markets, but I see almost no chance of that happening this year and at this point, only a 10-20% probability of it occurring in 2018.
  2. Runaway inflation. It would take a horribly complacent or politicized Federal Reserve to let this happen, especially since we’re barely at 2% now. Probability this year: zero, and 10-20% in 2018.
  3. Big Fed rate increases. Janet Yellen has one more year as Fed Chair, but she’s been very cautious during her first three. The market is pricing in three hikes in the federal funds rate this year; any more would probably provoke a slight correction. Next year, all bets are off, depending on whom the president appoints. Probability of rate-induced sell-off this year: 20-30%. Chances in 2018: 30-50%.
  4. Trump’s YUGE plans don’t get passed. The president can make changes by executive fiat. But Congressional Republicans remain deeply divided over Obamacare, infrastructure, even tax reform. Politico’s ace congressional reporters write: “This deal won’t get done in a few months — mark our words…Tax reform is likely a multi-year process. Any deal could die for a thousand reasons.” This could really sting. Probability of policy disappointment in 2017: 30-50% and in 2018: 50% plus.
  5. Geopolitical crisis. In MarketWatch this week, I wrote that geopolitical crises are the market’s biggest black swan risk. They’re by definition unpredictable, but given global instability and the Trump administration’s upset-the-applecart philosophy, I’d put the risk of a geopolitical market sell-off at 30-50% this year and 50-100% by 2018.

The weight of the evidence still suggests staying fully invested in stocks. But as we move into the spring and summer, some of the bloom may come off the Trump rose. We’re monitoring it closely


2 thoughts on “What Could Derail the Trump Train

  1. Howard,
    Since the economy has changed so much such as the problem with bonds…
    Shouldn’t you adjust your portfolios to make the same adjustments……I am retired and would not follow your Fidelity retirement portfolio…please advise me as to changes you might make….
    Thank You,
    Jon O’Dell

    1. Jon: We revised the suggested Fidelity retiree plan in December, as we explained in an email to subscribers, eliminating international bonds and adding to our inflation-protected securities holdings. The suggested plan is now 40% stock and 20% short-term bond with 10% inflation protection and 10% in cash. It is thus pretty conservative and in our view positioned well for rising interest rates and a return of inflation. Please let me know if you have further questions. HG

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