‘All Clear’ for the Market? Not Yet

As a product of the Reagan revolution, watching the media coverage of the passing of Nancy Reagan left me sad and reminiscing about my youth. Most importantly, it reminded me of the dark days of Jimmy Carter and the light of economic hope which Reagan represented. Understand, during the Carter years with the marginal top tax rates at very high levels, unemployment a serious problem and interest rates running around 15% to 20%, the prospects for coming out of school and finding a job were dim at best.  Capital preservation became the mantra. Then came Reagan who cut all taxes, widened the base and freed up the needed seed capital which launched many of the great companies we trade to this very day, all with Soviet missiles aimed at us. It was a Godsend! I was 19 and proudly voted for the first time. It became governmental poetry in motion. It was a time when fiscal conservatives and progressive Democrats treated each other with respect (to a point), compromised for the sake of the country and the office of the presidency was dignified. The point is: That’s how economies grow.

Fast forward to March of 2016. We are in the middle of the greatest global expansion anyone could have ever imagined, led by American Free market-style capitalism which could take global equity markets to unimaginable levels in the next few years. This ‘Global Growth’ phenomenon is witnessing international trade at levels never before seen and producing goods and services at a record pace. So what seems to be the problem? Success. The adoption of our market-driven system by the rest of the world also brings the ancillary effects of the boom and bust cycles. It’s important to remember, as Dr. Milton Friedman, the Nobel laureate taught us, we in the U.S. are the beneficiaries of twin miracles; An economic miracle coupled with a political miracle. As a student of the markets and someone who had the privilege of meeting Dr. Friedman, I am convinced that the two are forever intertwined. That might seem like an obvious statement but let’s take a closer look.

As the ECB, BOJ and the Fed began the central-bank-a-thon starting last week, the markets seem to have found a certain sense of stability. Portfolio managers, who had put on the ‘market deterioration’ spread by selling S&P 500 and buying fixed income, found themselves in a crowded trade and the short covering was explosive. But as a long time bull it is time to address the lack of pro-growth policies which are needed for real expansion. We can argue all we want about the job creation and the inflation data but the most important factor affecting the markets, aside from the Fed, is fiscal policy. To re-engineer that statement, imagine where the market would be under the Reagan years with this prolonged low interest rate scenario. The reality is that without the help of solid pro-growth fiscal stimulus, the central banks can only do so much. The economic cycle came and went without any help from Washington. A repricing of assets is deep underway. Portfolio managers will still be sellers into strength for the foreseeable future led by the price of crude. A collapse in crude prices will bring on the next wave of equity selling. Capital is being held hostage to the volatility in the crude oil market, like it or not. Unfortunately, the ‘all clear’ for the market is ambiguous at best. Portfolios need to remain long but fully protected and flexible while we watch the energy and political dramas play out.

The next few months for the market can be treacherous for traders. If possible, use the volatility to your favor. The electoral process should be watched very closely for any hints of a true economic plan. Aside from building walls and checking private emails the office of the presidency, as shown by Ronald Reagan, can transform the country and lead it to its true potential. Finding a way to repatriate trillions of dollars Corporate America has abroad with an established territorial tax, along with true corporate tax reform at home, should be in every candidate’s agenda, Democrat or Republican. (Except Sanders for obvious socialist reasons!) As the global leader in free market ideology, we must do something to attract capital and ignite global growth. To be honest, we are the only ones that can make it happen. When the U.S. coughs the rest of the world catches cold; when the U.S. smiles, the rest of the world becomes euphoric.  Without a pro-growth message coming out of D.C. to the rest of the world, this economic malaise might be the new normal. With a REAL plan…Wow, can you say 30k Dow in a few years?

About the author:

Jack Bouroudjian is CEO of Index Futures Group, LLC, a registered introducing independent broker and is CIO of Index Capital Partners, a registered commodity pool operator.

He has more than 30 years of industry experience and is a founder and advisor of Universal Compute Exchange. Jack is a published author of “Secrets of the Trading Pros” (Wiley, 2007.) He is a graduate of Loyola University of Chicago and is happily married with two children.
Follow Jack Bouroudjian on Twitter: @JackBouroudjian