Ad Hoc Commentary – a strong stock market helps Trump as average Joe ‘feels left behind’

The ferocity of the Brexit sell-off and the subsequent strength of the pullback seems to give credence to the belief among some market participants that “bad news is good news”:

“…disappointing economic news has been interpreted as implying that central banks will be even more engaged in repressing volatility, pushing asset prices to higher artificial levels and by, making people ‘feel richer’, getting them to spend…”

The Only Game in Town, Mohammed El-Erian, 2016.

Except that yours truly thinks that average Joe do not ‘feel richer’ anymore when S&P500 goes from strength to strength. On the contrary, average Joe will ‘feel left behind’ as he reasons:

1. The S&P500 was 1500s back in 2007.

2. The S&P500 is 2100s this year.

3. This means that, on average, everyone did 40% better today.

4. I am doing worse today than in 2007.

5. I don’t ‘feel rich’, I ‘feel left behind’ by the system.

6. The current system does not work for me.

7. This is unfair, I want change.

The unprecedented central bank actions, as evident by their large balance sheets post-2007, distorts asset allocation and supports financial risk taking that helps S&P500 and equity markets around the world. This however, is not bringing about economic risk taking on Main Street that would help average Joe get a better paying job, or create technologies that brings productivity growths. Instead, central banks, in their quest to help jumpstart the real economy, is inadvertently propagating a fiction of good times through the S&P500. This fairty tale of good times is unfortunately creating resentment on Main Street.

From this perspective, it is not very difficult to understand why those who want significant changes are gaining ground around the world: the National Front in France, the Alternative for Germany (AFD) in Germany, the Danish People’s Party in Denmark, Syriza in Greece, UKIP in Britain, and last but not least Donald Trump in America.

So, it is likely that the higher the S&P500 rise, the more likely that we will see a Trump White House come 2017. In the past, yours truly believed that the Democrats will definitely win in November against a broken Republican Party. However, the Democratic Party is actually not very united too. Remember Bernie Sanders?

Brexit should be the moment for Democrats to realize that victory is not guaranteed. Assumptions should be reevaluated, and chief among this is the age-old assumption that “a strong stock market helps the incumbent’s party”. If anything, the financial fiction propagated by today’s S&P500 is bubbling up more resentment than goodwill.

Good luck in the markets.