​Hangover from Trump Market Party to Cause Recession; History Repeats Itself

Michael Markowski  |

If history repeats itself the hangover for the party held by the market for Trump that ended the Friday after Thanksgiving could last two years. Trump’s market party ended with the S&P 500 closing at its most recent all-time closing high. The party that was held by the market for Reagan in 1980 also ended the day after Thanksgiving with the S&P 500 at an all-time high. The hangover after Reagan’s party resulted in a recession which began in July of 1981 and ended November of 1982. It also resulted in S&P 500 not getting above its November 1980 all-time high until November 1982.

The market’s 2016 pre-election and post-November Presidential election action for Trump, a maverick who was elected as US President was identical to the market’s November 1980 pre-election and post-election action after Reagan was elected. For both 1980 and in 2016 the S&P 500 reached new all-time highs in the months preceding their elections. The market in 2016 reached an all-time high in August. The 1980 market traded to an all-time high in October 1980.

Both markets sold off in the two weeks prior to the November elections. Eight days after Reagan was elected the S&P 500 hit an all-time high. For Trump the new high for the S&P 500 after he was elected took nine days. Upon Reagan’s 100th day in office the S&P had given back most of its post-election gains.

The end of November 1980 all-time high for the S&P 500 would not be eclipsed until November of 1982.

The euphoric conditions for Reagan, a former actor, Washington outsider and staunch conservative were on par with or even better than Trump’s. During 1980 the mood of the US citizens was somber. 52 American diplomats and citizens were held hostage for 444 days from November 4, 1979, to January 20, 1981, the day after Reagan was inaugurated. Additionally, the US economy had suffered a mini-recession in early 1980 and inflation was at highest since the Civil war. Finally, Reagan’s landslide victory (489 electoral votes to 49) over President Jimmy Carter ranks as the worst defeat for a US President attempting to be re-elected in the history of the United States. The mandate that Reagan had was similar to Trump’s. Even though Reagan won the popular vote count Trump has the potentially stronger mandate for two reasons. The first is that unlike Reagan both the US Senate and the House of representatives have republican majorities. The second is that Trump due to his personality and his not being a politician, he will more actively utilize the bully pulpit to force the changes that he wants to make. I predict that Trump will have his way with the US Congress more than any previous US President. See my November 13, 2016 “Trump Election Anomaly Now Driving Market Anomalies” article.

The S&P 500 hit its low for Reagan’s two term presidency in August of 1982. During Reagan’s first year in office the yield for the 10 year US Treasuries reached their all-time highs. The yields for US Treasuries likely reached their all-time lows in the months prior to Trump being elected.

Reagan’s only recession during his presidency was primarily caused by a spike in the US Dollar versus the rest of the world’s currencies. Increasing yields were a secondary and contributing factor since the higher rates increased the demand for the US dollar. The day before Reagan was elected the 10 year Treasury was at a yield of 12.7%. The yield increased by more than 300 basis points to 15.8% during the summer of 1981.

The risk of a Trump recession has increased because of the new president elect’s having a campaign platform that promoted both Nationalism and Protectionism. These policies created an insatiable global appetite for the US dollar and the dumping of long term bonds. See my article “Nationalism and Protectionism Now Being Priced Into US and Global Markets”, November 14, 2016. The tandem policies have caused powerful spikes for the following:

  • US Dollar exchange rates. The spike of the U.S. dollar to multi-year highs will likely be the primary cause of the Trump recession that will begin during his first year in office. The increasing dollar will have a direct impact on a majority of the multi-national company members of the S&P 500. The result is that their goods become more expensive. Boeing (BA) is a good example. Its planes will become more expensive to foreign buyers and it will lose orders to Airbus.
  • Long term bond yields. The US 10 Year Treasury Bond’s yield increased by approximately 50 basis points from 1.85% to 2.45% since Trump was elected. The swift increase has already resulted in shocks for the US economy. The housing market will be impacted by the 30 year mortgage rates ratcheting up. It will likely have a negative impact on consumer sentiment and spending since the bonds that are held in millions of 401Ks and IRAs declined significantly during November. See Bloomberg “Global Bonds suffer Worst Monthly Meltdown as $1.7 Trillion Lost”, December 1, 2016.

From my monitoring Bloomberg TV and CNBC more than 12 hours a day I have observed that most analysts and investment advisors discount the crash of the bond market that is currently underway. The reason they all cite is because yields are still historically low. What everyone is missing is that a relative change in yields can cause a shock to the system. In 1981 the U.S. Treasury’s 10 year yield went from 12.7% to 15.8%. The 310 basis point increase represented a 24% increase in the yield. What this meant is that residential real estate mortgage rates increased by 24% since mortgage rates are based on the 10 year U.S. Treasury bond yield. For the economy to maintain its status quo or not to fall into a recession after this happened in 1981, one of three negative things had to happen:

  • The incomes for all of those attempting to obtain a mortgage to purchase a home had to increase by 24%.
  • The prices of houses had to decline by 24%.
  • The buyer of the home increasing their down payment by 24%

Since Trump was elected the 10 year has gone from 1.85% to 2.45%, a relative increase of 32%. What is very scary is this happening so suddenly. The economy has not had the time to digest. The prices of the 10 year bonds have not made any attempt whatsoever to find a bottom. Should the yield spike to 3% or above the relative increase could approach 100%. The 20 year U.S. Treasury ETF (TLT) traded at a 52 week low on December 1, 2016.

Based on the extremely positive sentiment that the world’s investors now have toward the US dollar history is likely to repeat itself. The US being a safe haven along with the yields for the long term US Treasuries increasing practically guarantees that the dollar will soon hit decade highs versus most currencies.

Predicting the dollar’s direction for 2017 is a slam dunk based on the performance of the dollar during the first year of Reagan’s presidency. Both Reagan and Trump were longshots to win the US presidency. They were both change agents and Washington outsiders who ran on platforms to reduce government regulations. They also appealed to the same demographics. There is no reason to believe that the markets during Trump’s first two years in office won’t mimic Reagan’s. It’s especially since the currency, bond and stock markets during November 2016 were in lock step with November 1980.

The chart trading patterns for the exchange rates for the dollar and the yen during November of 1980 in the dollar yen chart below are interchangeable with November 2016. The day after Trump was elected and throughout the month of November the greenback soared versus the yen and the euro. For Reagan’s November, the dollar to yen exchange rate increased more than three percent from 210 to 217 yen. For Trump through the end of November the increase was eight percent. In December of 1980, the dollar reversed and declined to a bottom of 198 coinciding with Reagan’s inauguration. The dollar than abruptly reversed course yet again and appreciated to 245 yen, a 22.5% increase by August 1981. The dollar’s net 16% advance versus the yen from the day before Reagan’s election to its August 1981 peak caused a US recession which began in July of 1981 and ended in November 1982.

The chart depicting the exchange rate for the U.S. Dollar and the German Deutschemark (DM) is very similar to the chart for the dollar yen. From November 1, 1980 through August 1, 1981 the US Dollar appreciated by 37% versus the German Deutschemark. The chart of the DM was utilized since the euro was not a currency in 1980 and 1981.

Based on my analysis of Reagan’s markets my conclusion is that history is and will continue to repeat itself. The dollar will continue to advance versus the euro and the yen and the rest of the world’s currencies. Similar to the freight train that pushed the dollar up significantly versus yen and the deutschemark during the first eight months of 1981, any pullbacks by the dollar should be treated as a buying opportunity. I also predict that the yields on long term bonds will continue to also climb higher. Both the yields and the dollar will continue to go higher until they cause a U.S. Recession.

It’s also very likely that the S&P 500 may have already reached its high for 2016 or will reach its high for 2016 and 2017 by the end of 2016. The stock market is susceptible to a severe correction or crash because of the crash of the bond market which has continued to lower lows. My “The Post-Election Crash of Bonds Increases Risk for the Crash of Stocks”, November 14, 2016 article is highly recommended.

My recommendation is that investors effectuate a 90/10 Crash Protection strategy. For information about the strategy which is the only one that protects liquid assets from crashes and recessions see “Crash! & 90/10 Crash Protection Strategy” video below:

I predict that the S&P 500’s 2017 close will be lower than its close for 2016. Most of the index’s members are multi-nationals and thus will be negatively impacted by the surging dollar. However, small cap and micro-cap companies will outperform large cap companies in 2017 and 2018. See my November 21, 2016, “Trump Brings Small Company Tailwinds, Big Company Headwinds” which includes five recommended micro-caps. Small companies are much more immune to recessions and micro-caps are at their lowest relative valuation in 40 years. The valuations and share prices of micro-cap companies have been severely depressed due to the passage of the Dodd Frank Act.

For more on the divergences that Dodd Frank has caused for the markets view video “____________________” below.

In Summary

For an overview about me and access to links to the subjects that I cover, including the digital economy, negative rates, perfect shorts, and micro-cap stocks please go to www.michaelmarkowski.net.

The signals for the NIRP Crash Indicator which has been monitoring the markets for crashes since March 2016 are freely available at www.DynastyWealth.com and are updated after the close of the markets each day.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.



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