A CNN Money article this weekend provided contrarian
investors with a moment of clarity. “Trump and Cruz predict stock market ‘crash’”
the headline proclaimed. Contrarians couldn’t find a more emphatic
statement of mainstream bearish capitulation than that.
The
market opinions of high-profile public figures are always as fascinating as
they are instructive. Most public figures have only an elementary
grasp on the financial markets; this is doubly true for politicians and
political candidates. In instances when these figures make public
predictions about the market it’s almost a guaranteed contrarian bet that
they’ll be wrong.
“The problem with using monetary policy to juice the system is
that it creates bubbles,” Cruz said. Trump expressed a similar
sentiment when he said Americans were “being forced into an inflated stock
market and at some point they’ll get wiped out.”
Never mind that both statements can be disproven. A
loose monetary policy doesn’t create bubbles; it can feed or augment them but
not create them. Bubbles are a manifestation of mass investor
psychology and are the result of synchronized human
endeavor. Central banks can provide liquidity to fuel asset bubbles,
but the Fed has no control over how or when a bubble gets started.
As for Trump’s statement that investors are “being forced into an
inflated stock market,” that’s also untrue. No one is forcing
investors into equities; if anything Wall Street has had extreme difficulty
trying to persuade casual investors away from money markets and into
stocks. Despite the lofty levels to which stocks have soared in
recent years, direct participation among retail investors is astonishingly
thin.
The Cruz/Trump crash prediction also provides insight into the
mindset of the multitudes. They’re still feeling fearful and
uncertain about America’s economic outlook. Their collective
misgivings about the economy have allowed equities to rally as vigorously as
they have since the February market bottom. Indeed, it seems that
the “Wall of Worry” has supplanted the “Slope of Hope” as the bulls have
regained command of the stock market.
The takeaway on the market prognostications of candidates Cruz and
Trump is that a crash is highly unlikely in the balance of
2016. Their statements show that fears of an asset bubble and
subsequent market crash are entrenched among mainstream
observers. This in turn strongly suggests that the worst case
scenario has already been priced into equities in the
intermediate-term. Any hopes among the bears for a crash will likely
have to wait until after the 2016 election is over.
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