Wall Street caked its trousers on Wednesday.
The Street seems to be reaching the point where fear of a Trumpian future outweighs hope for a Trumpian future.
Whatever your position on the White House occupant, one fact is clear: He represents a definable risk, as it relates to Wall Street and our investment dollars. And it’s a risk that has grown larger in the last week because of the Comey/Russia affair.
Republicans increasingly realize they face an impossible quandary: Continue to support party over country, or concede that this president is uniquely out of his league and making a hash of American realpolitik. That has economic ramifications and, thus, ramifications on Wall Street since Trump’s crises-du-jour impacts the very people he needs the most – fellow Republicans – to move forward the economic agenda Wall Street has been betting on since the Nov. 8 election.
My bet – and this was Wall Street’s message on Wednesday – is that Republicans and their big-money donors see Trump as a political STD and will distance themselves from him and his agenda. Which means they’re not likely to stand behind him on tax reform, spending and the “big beautiful wall.” Doing so means they get tarred with his antics as they begin to raise money and campaign for the midterms elections that happen next year.
That’s precisely what the Street reacted to on Wednesday – fear that everything the good side of Trump supposedly represented is out the window because the bad side of Trump that really exists keeps dominating headlines.
For us – investors – the message of the markets is clear: Even if stocks rebound from Wednesday’s decline, the political risk to the economy remains entrenched in the White House. Until that changes, it’s safer to move some of our cash out of the dollar and U.S. stocks and into Europe.
Since early 2015, I’ve been urging my readers to reduce exposure to US stocks and to the dollar. As I’ve regularly pointed out, Europe’s economy is much better than advertised, while America’s is weaker than presumed. Moreover, the political risk in Europe is low now that populism is dead – yet political risk in America is greater now than it was even in the Nixon years. At this point, impeachment is a very plausible risk scenario – as is the equally real possibility that Trump avoids an ego-shattering impeachment vote by resigning and blaming it on the dynamics of DC that never allowed him the freedom he needed to make America great again.
At this point, Europe and the euro are safer places to invest money.
The European Central Bank is on the verge of a rate hike because of the strength of the Continental economy. Our Fed, meanwhile, hasn’t much runway to lift rates anytime soon. The never-ending Trump crisis du jour has created such economic uncertainty that raising interest rates in this environment would be risky and irresponsible. I’m saying the Fed passes on a rate hike at the June pow-wow and, barring some insane turn around in the political climate, probably won’t raise again until December, if then.
So, we’re likely to see the euro continue to rally. I originally calculated the euro would move past the buck-fifteen level. But given the political, monetary and fiscal uncertainty in America these days, and the relative tranquility in Europe, I can easily justify the euro fetching $1.20 by year end. We’re at $1.11 or so today.
And I can easily foresee European stocks continuing to outperform the US – and by “outperform” I mean I see European stocks rising while US markets retreat. The valuation gap isn’t justifiable, given that the blue chips on either side of the pond are effectively doppelgangers of one another with profit margins that are similar and products that are often interchangeable. The only difference is the political and monetary environment (which Europe wins) and the valuation level (which, again, Europe wins).
Thus, I continue to sound off on iShares MSCI Europe Small-Cap ETF(NASDAQ:IEUS) and Guggenheim CurrencyShares Euro Trust (NYSEARCA:FXE).
Small-cap stocks tend to outperform in the early stages of a rate-hike environment, when the economy is just beginning to improve – which is the environment Europe is moving into. And the euro will outperform as the ECB raises rates and the Fed stands pat for a while.
We all have our thoughts on the current administration in D.C. … but one thing I think most rationale investors can agree on is that Donald Trump represents political risk. And the buffer is reducing exposure to the dollar.