There is a saying on Wall Street called “buy the rumor, sell the news.” It refers to when the market (or a stock) runs up in anticipation of an event, only to sell off when the actual event occurs. Examples include product announcements, analysts meetings, economic reports, shareholder meetings and especially earnings reports. I wouldn’t be surprised to see a “sell the news” event after the Presidential Inauguration for the following reasons:
1) Sentiment – In April 2016, when the Dow was 17,500, I made a call for Dow 20,000 mainly because sentiment was extremely negative. I ended up being right on this call (actually missed it by 13 points) and was very pleased with my significant out-performance. Since the election, however, sentiment has completely turned around. The majority of sentiment surveys are showing extreme bullishness and money managers are more invested than they have been in a long time. It doesn’t mean a major correction is coming, it simply means the market may need to shakeout some of this excess bullishness.
2) Seasonal Trends – The first 30 days of an incoming White House administration tends to be difficult for stocks (see table below via @SPGMarketIntel). It’s possible the market could see profit taking while it waits for a clearer agenda from the new administration. In addition, most earnings will be done by February and the market will have fewer catalysts.
3) Geopolitical Risk – Trump said he might leave the inauguration party early in order to get to work immediately. We have already seen the effects his tweets can have on individual companies and specific sectors such as Biotech. Many people fear he could tweet or announce something that will affect the entire market. Potential examples include something trade/tariff related, hinting at higher interest rates, suggesting he will replace Janet Yellen, or proposing a new tax plan that is less favorable than many expect. He could even go as far as to pick a fight with a world leader, thus leading to increased tension and market uncertainty.
As I wrote many times last year, I still believe we started a NEW Bull Market in July 2016. Longer term, I feel the market is headed higher over the next 1-2 years as GDP can grow from 1.5% to over 3%. However, the market doesn’t go straight up and we will see shakeouts, pullbacks and corrections along the way. This doesn’t affect long-term investors, but for active managers like myself, it is important to anticipate moves based on your analysis and let the market prove you right or wrong. I currently have a larger than normal cash position for my clients and I even added some short positions last week to hedge our long positions. Again, I am not calling for a major correction, just a potential “sell the news” event after the Inauguration. If this happens, it might feel worse than it really is because the recent low volatility has lulled people to sleep.
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