The latest ETF momentum rankings are presented below, after some commentary on the Trump effect on markets.

The Trump Effect and Markets

Virtually everything that has happened since the election in financial markets can be attributed to the Trump effect.

The run-up in value was driven by the euphoria associated with massive regulatory and tax reform and their expected benefits on the economy. These expectations drove markets to record levels, despite the general recognition that the market was overvalued prior to the election.

This chart, from Zerohedge, shows current values of traditional metrics versus historical norms:

If Trump inherited a market that was overvalued and it has risen dramatically since, a market correction is more in order today than before the election. Animal spirits and optimism can go only so far. Ultimately economic conditions must change dramatically in order to rationalize current market levels.

The Trump Effect and Realpolitik

The initial Trump effect is now wearing off, being replaced by the reality that the swamp may be too big and too deep to drain. Reality ultimately shapes expectations and the reality is that Trump and his ideas are not welcome in Washington.

The stock market explosion was not incorrect in one sense. The US economy, freed from the excessive burdens of Washington, could again become a massive job and wealth generator. Whether current market levels are under- or overpriced depends on the degree of freedom (reductions in government) restored to the country.

Classical liberals might argue that markets are undervalued at current levels if their idea of limited government could be implemented. Others might argue that enough change is coming via Trump and his programs to support current levels. Finally, a third group might argue markets are overvalued because change is all talk and little to no change is coming.

The judgment regarding market valuation turns on economics versus politics. If you believe that good economics will prevail, you are likely comfortable with current market levels. If you believe that politics will prevail, you are likely uncomfortable. Put differently, if Washington wins this battle markets are overvalued.If Washington loses, markets are fairly or undervalued.

Danger Ahead

The point has been reached where expectations are colliding with reality. The idea of tax reductions and regulatory reform that propelled Trump to victory and markets to new heights is in doubt. What looked highly probable before (improvements in the economy) now looks like “same old, same old.”

Worse, Washington has no intention of giving up any power. Instead, they are reacting to the president as it he is some foreign body that has infected their system and must be removed by whatever means possible. No one can cite one illegality, yet we have an investigation that has been on-going for nearly a year. As Victor Davis Hanson has pointed out:

We’ve had the director of national intelligence James Clapper say it didn’t exist, Senators Dianne Feinsein and Chuck Grassley say this, FBI director Comey said there was not an ongoing investigation.

The “seriousness of the charge”, a ridiculous claim used against George H. W. Bush, justified an investigation that went nowhere. Today, the standard has apparently been lowered to the “seriousness of the rumor.”

In the recent week, it has been nearly impossible to watch national news without hearing the word “impeachment.” What is going on is dangerous stuff, both for the country and markets. Regardless of how one feels about Trump, he was elected by the people. Now the Washington establishment is showing what they care about the people. Their monopoly is too important to allow the people to have a say. No outsider is entitled to come to Washington and change it.

Market Update

No market update can avoid the political reality that Trump is an outsider and not wanted by either political party. In itself, that makes for fascinating, even surreal, political actions designed to rid the system of this threatening “foreign substance.”

Markets had a rough recent week. Strength at the end of the week cut losses but the vulnerability of markets to politics was demonstrated. Do not expect matters to get any smoother in the near future.

Power corrupts and when challenged does not care who it damages.

Here are the latest non-trade day rankings (WkBk0) and the five previous weeks:

WkBk0 = Market Close 5/19/2017

Good luck and good trading.