Thursday, December 27, 2018

Buy the dip: Trump rallies could win him the elections

For the stock markets, December 2018 seems like the worst month since the Great Depression. The Christmas Eve trading saw another big drop of the markets. However, the Boxing Day (Dec 26th) saw the greatest point gain of Dow Jones ever. Those 1086 were almost 5%, Nasdaq gained over 6%, but as a percentage, 5% is nowhere near the greatest percentage gains – almost 15% a day in 2008. A dozen of positive days above 9% have taken place.

The prices are very volatile because traders and investors got nervous. That partly explains the big jump, too. When things can go down dramatically and VIX (a fear index) is above 30 while it's often been below 10, they can sometimes return up and it may be equally dramatic. But why was really a 5% jump? Trump's people assured everyone that they're not firing Mnuchin and Powell (yet). On top of that, Trump said "buy the dip". I actually think that it made difference.

While the president told the people that it's a great opportunity, market analysts may argue whether it is a good recommendation. Sometimes it's not. Knives may keep on falling. Bitcoin snake oil salesman have been saying "buy the dip" after every 5% drop during the Bitcoin price journey from $20,000 to $3,700. ;-) I think that in the stock market case now, it is a good advise, indeed. The P/E is lowest since 2013 or so – stocks are cheapest for some five years – and is close to 13. It's been 18, too.

Do you remember the mood of 2013 and the gains afterwards? I do think that most people think that they should have bought more stocks even in 2013.

It's my understanding that there exists a core of investors who listened to Trump's words and bought in order to show that they're patriots or Trump people. And then there are many more – those making a big positive feedback – who aren't so big patriots but who bought because they figured out that patriots exist and those would lift the stock markets.

I think it's a great idea for Trump to use this verbal manipulation to lift the stocks at some point, in order to
  • keep some stability and safety in the market
  • make the American indices great again, in order for him to look great, too
  • win the elections
Let me assume that you believe me that a substantial number of traders may be affected by Trump's words in this way. It can be used in many ways. For example, Trump could say:
Maybe you didn't know but it's a sane idea for the forward-looking P/E to be between 14 and 18 at all times, and great Americans should buy or sell stocks to make it so.
I actually believe that a Trump tweet with this content could reduce the probability that the stocks are outside the interval by an order of magnitude or two. But if he wanted, he could kick the stocks to some record high numbers. That could be a great idea before the 2020 elections, in order to improve the overall mood.
Hi patriots, just buy lots of stocks, to prove that you believe that my first years in the White House have made America greater again.
Not everyone has stocks but I think that the overall sentiment goes up basically in the whole country when the stocks go up and the president unavoidably gets a part of the credit for that. A nice side effect is that when Democrats win after this pre-election rally, the markets could collapse back. Trump could tell everybody to sell when they don't like the Democrats. And that could become a self-fulfilling prophesy, too.

The threat of this self-fulfilling prophesy could discourage many people from voting a Democrat.

There is some potential for similar unusual verbal interventions and we may see more of them in the future. Meanwhile, I believe that Americans should be encouraged to become active investors. The number of active investors seems to be dropping which leads to low volumes and inaccurate prices of many stocks, especially those of the small companies. Much of the trading is increasingly done by index funds and those who copy them in various ways and that's just bad because the quantification of the relative prices of companies is the most important job of the investors, the most important contribution to the system that they are making for their getting higher returns in the long run.

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