S&P 500 Faces a Contrarian Crossroads as Trump Era Returns

As an intro to this fundamentally bearish article, I would like to state that strictly as a technical analyst, I have a bullish view of the US stock market. There can be no other view for a TA, given the firm uptrends. But from the macro-fundamental side of things, danger signals aplenty manifested in 2024, into the new year.

Contrarian Pivot?

Donald Trump has been sworn in as the 47th US President. Depending on how you view him, he is a successful businessman, reality TeeVee star, narcissist, American nationalist, and a well-intentioned “America first” advocate. It’s going to be an interesting 4 years. Much more interesting, in my opinion, than had his opponent won the election and maintained the status quo.

That calls us, as market participants, to attention. We need to be ready for something very different than the last 4 years. The common wisdom is that Republicans are more business-friendly than Democrats. That Republicans are less regulatory. That Republicans are more tax-friendly. That Republicans are more pro-America. Well, Trump is all of those things, on steroids (and so much more).

As a participant who is beyond caring anymore about who is in office (because, it seems, we as a society have devolved to a point where we get the candidates we deserve), I only want to know how this period in time is going to resolve, market-wise. Well, that’s my job, anyway. It certainly is not my job to offer political beliefs, especially when they would be quite depressing if offered.

So, it is on to market management; my comfort zone. I’d like to start off with another graphic, courtesy of Michael Pollaro. The price of the stock market () vs. Fed liquidity, post-financial crisis, is a compelling view of stock market expectations out of whack by yet another indicator (as if we needed more of them).

Something has driven stocks well beyond their usual benefactor, which has been liquidity manufactured by the Fed’s monetary policies. That policy is rightly in downward consolidation from nosebleed levels registered in 2020. Yet stocks continue to climb.

What is driving this? Options are:

• Anticipation of beneficial tax policy, de-regulatory policy, the hope that tariffs are going to shake out as a net positive for US corporations.
• The idea that Trump will be able to increase the fiscal bag of debt, unabated, as he wishes. In other words, that unfettered government fiscal policy will continue and even accelerate while the Fed continues to QT and hold relatively firm on the Funds Rate.
• The idea that Trump will be able to easily cheapen the , as stated. This option is, IMO, doable, given the debt situation and his stated goals for more of it.
• A post-hubris society believing in magic:

1. Believing that debt can simply be rolled over again and again, to new stratospheric heights, to the benefit of the economy (they will try to roll it over indefinitely, but it is the “to the benefit of the economy” that is in serious question).
2. That steepening yield curves, proven indicators of the “bust” side of the boom/bust continuum (curve flatteners have been proven to be the opposite, running with a “boom”) no longer matter.
3. That market valuations, near historically high levels, no longer matter (because “America great again”?).
4. That extreme insider selling no longer matters.
5. That the situation in 2007, when inflationary pressure interrupted the Fed’s rate “pause” regime, with the bond market demanding tightening policy, preceding an epic bear market, will not play out this time.

Bottom Line

As always, we note that anything is possible in Wonderland. I have taken pains over the last many years to make sure I do not get overly influenced by my inherently negative views about how the system in general is run. I have taken pains to call “bullish” when my indications say so. Right now, while mainly in cash and equivalents and long some equities (with a token short on ), I am calling bearish because the indicators say so.

Timing is always an issue, however. That is why I find this point in “time” fascinating. America = great again. Trump ascends once again. Businessman, de-regulator, tax cutter, tariff imposer. It’s all good! Now, even assuming some of that is true, is there not scope for the stock market to have discounted it all? I say yes. I also see a wonderful contrarian potential here.

Our view all through 2024 was in essence that the Biden administration (with the 2-faced Yellen in a side car) was pulling out all the stops to keep things liquid and keep Trump out. Well, he is in. But he inherits a well pumped stock market (T1) and economy (T2). Thing 1 is burdened by the indications noted above. Thing 2 is slowly decelerating, even as Trump prepares his brands of stimulus.

But the bottom line is, we are at a potential pivot point (not necessarily on Tuesday, but generally over the coming weeks) to a hard correction at best and a bear market at worst. “Potential” I don’t make predictions. Meanwhile, the stock market’s trends are up and that’s not nothing. It is very much something.