My Fellow Americans, More Volatility Lies Ahead
The air is getting thinner on Wall Street as stocks rise ever higher, with the S&P 500 trading at more than 25x GAAP earnings and investors rationalizing the irrational.
It's also my view that politics will weigh heavily on markets over the next several months -- at times even more than the business and profits cycles will. So, smart players should prepare to factor presidential politics into their trading and investment decisions regardless of their personal political views.
What we saw in last night's opening of the Republic National Convention in Cleveland (and will no doubt see as well at the upcoming Democratic National Convention) is that animus currently runs very deep in our society.
We also witnessed the profound weakness of the Donald Trump campaign, where the absence of a deep organization allowed Melania Trump (a seemingly bright, articulate woman) to crib a 2008 Michelle Obama speech. For goodness sake, if Melania Trump is going to plagiarize a first lady's speech, at least make it one from Mamie Eisenhower instead of Michelle Obama!
The American people aren't that stupid, but Trump campaign Chairman Paul Manafort made a bad situation worse by going on CNN this morning and denying that any plagiarism occurred.
Of course, neither major party has a monopoly on plagiarism. For example, Vice President Joe Biden's 1988 Democratic presidential candidacy was stopped dead in its tracks when he faced plagiarism accusations.
But regardless of your personal political beliefs, I think it's fair for anyone to take to the view that shallow organization, poor preparation, carelessness and inadequate finances could doom Trump's candidacy. Last night's gaffe (coupled with a poor rollout of Indiana Sen. Mike Pence as Trump's running mate) reflect the Republican establishment's worst fears -- that the Trump campaign lacks the organization necessary for a successful presidential run.
How does this play into the markets?
Well, adding a wild presidential campaign on the part of both parties to our elevated valuations, weak global economic growth and rising geopolitical tensions suggests that even more volatility lies ahead. I expect an unpredictable market that's without memory from day to day and week to week -- probably for most of 2016's balance.
As such, I'd suggest that you keep both your investment and trading positions small, as the market's downside risks look to me like they dwarf the upside opportunities.
Given this poor upside vs. downside, my investment and trading moves continue to focus on the short side. But hopefully, we can find some more Netflixes out there to short!