It's a Trump Market

In a past article I mentioned how the chances of Trump’s election rising would cause the market to decline because his monetary policy statements have been critical of the current administration’s dovish policies, which I call a Trump Market. If the current policy was hawkish, the economy would crater. A Trump election could cause a sharp decline in the market. As I said, the election would not only cause a decline on November 9th, but there would also be a decline leading up to it. We saw evidence of this today with the market selling off about 1%. In fact the market has been down 6 days in a row.

According to the PredictIt betting market which gauges the chances of various events happening, Trump’s chance of winning on Sunday was 32%, on Monday it was 33%, and today it is 34%. According to 538’s polls-plus forecast which uses the polls and historical data to predict elections, Trump has a 29.9% chance of winning. I think the polls will move further in Trump’s direction in the next few days.

An important aspect to understand with polls is they tend to cluster. Polls are taken and then weighted using measures which predict what the turnout will look like. This means the polls can be manipulated to generate a specific result. Polls tend to cluster because the pollsters do not want to have a poll which looks nothing like the others as it makes them look bad. This means that polls can change gradually even as the electorate changed its mind quickly. This is why I think the polls underestimate Trump’s momentum. Even ignoring this the Real Clear Politics average has him down 2.2% which is much better than the 7.1% deficit he had a few weeks ago.

Even though next week’s election will drive the market every day until November 9th, we must still look at the traditional economic data to see what the market will turn its attention to after the election. Even before the release of the Q3 GDP report, it was evident that it would have the highest growth rate for 2016. We are seeing that play out as Q4’s estimates are lower than Q3’s 2.9% growth rate. The Atlanta Fed’s GDP Now estimate for Q4 GDP growth was lowered from 2.7% to 2.3% today because of the weak ISM Manufacturing report and the weak construction spending report.


The aspect of Q4’s GDP growth I will be focused on the most is the consumer spending since it slowed rapidly last quarter. It is the holiday spending season, so that will weigh heavily on the stocks associated with discretionary spending. This quarter the GDP Now started at a lower growth rate than Q2, so it has less to fall to 0%. Obviously, it doesn’t necessarily have to fall, but the trends in the data have led to this being a reoccurring situation. Currently the Atlanta Fed’s prediction is about in-line with the Blue Chip’s prediction. The Atlanta’s Fed’s model tends to be more volatile than the Blue Chip forecast because it is an average of many predictions. Generally the Atlanta Fed’s model leads the Blue Chip because it immediately takes into account new data points.

Tomorrow is the Fed’s meeting where it can possibly raise interest rates. There is only a 7.2% chance of an increase of 25 basis points. This scenario shows how political the Fed is even though it claims not to be. There is no difference between raising rates in November and December. The only thing between those dates is the election. Because of the election, this is one of the least anticipated FOMC meetings in years. I am with the consensus that the Fed will not raise rates.

I have also been focused on the weakness in manufacturing which has been reported today by individual firms. Eaton’s CEO stated “The decline in orders suggests to us that sales in the 4th quarter of 2016 and in 2017 are likely to be soft.” This statement is in tandem with results this quarter which were terrible. Revenues in the Electrical Products segment were flat. All of the other segments were negative. Electrical Systems & Services sales were down 3%. Revenues in Hydraulics were down 6%. They were down 3% in Aerospace and down 12% in the Vehicle segment.

Besides Eaton, Cummins also reported weakness. It’s as if the economists who are talking about the growth in manufacturing are living in an alternate universe. Cummins’ CEO stated “Due to the slow pace of growth in the global economy, we continue to face weak demand in a number of our most important markets.” All of Cummins’ segments had negative revenue growth. Engine revenues were down 12%. Distribution revenues were down 3%. Components and Power Systems revenues were down 8% and 13% respectively.


            The market fell today because Trump’s chances of being president rose. This is the most important part of the election season, so his momentum gives him a strong advantage even though he is down slightly in the polls. The market has ignored bad data for many quarters, so I don’t think the weak construction and ISM manufacturing data had an impact on the market today. Adding to this negativity, Cummins and Eaton reported bad results along with expressing a weak outlook for the rest of the year and early next year

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