I was struck by the sharp contrast between what Republicans and Democrats had to say as I listened to the Congressional testimonies of Federal Reserve Chairman Jerome Powell, U.S. Trade Rep. Robert Lighthizer and President Trump’s former personal attorney, Michael Cohen. All spoke on Wednesday.
Democratic and Republican politicians seem to live in two different universes. In contrast, most investors live in only one. Politicians use words, and words are free; investors have their own money at stake.
At Powell’s Humphrey-Hawkins hearing, U.S. Rep. Maxine Waters, a Democrat from California, called Trump’s tax reform a scam and the budget a cruel proposal to harm millions of families. Republicans, in contrast, said the economy is doing great and would do even better. At Cohen’s testimony, he called Trump a con man, a liar and a racist. Democrats agreed, while Republicans called Cohen a fake witness. Lighthizer’s testimony, on the other hand, was nowhere as bullish as Trump has been on the potential China trade deal. Democrats tried their best to put a negative slant on it, whereas Republicans were favorable even to a soft deal that may not be good for the U.S.
If you believe Republican politicians, consider backing up the truck and buying stocks. If you believe Democratic politicians, you might want to sell stocks.
Read: Tax scammers are looking for you — here’s how to avoid them
Who is right? What should you do now? Well, what about ignoring the opinions of politicians and focusing on undeniable facts? Let’s explore the issue with the help of a chart.
Chart
Please click here for a chart of S&P 500 ETF SPY, -0.20% dating to 1994. Please note the following:
• The chart shows that the price trend is still positive. I have learned from my 30-plus years in the markets that the price trend is to be respected, regardless of anything else. This is a huge positive for the bulls.
• Even though the trend is positive, it is overextended and long in the tooth. This is a positive for the bears.
• RSI (relative strength index) shows a divergence after reaching almost 100 twice during this bull run. (The maximum is 100.) The divergence shown on the chart is a negative for the bulls.
• Volume is relatively low during the rallies. This is a negative for the bulls.
• Earnings are the single best determinate for the stock market in the long term. Earnings momentum is slowing. This is negative for the bulls.
• There are lagging economic indicators, and there are leading economic indicators. At The Arora Report we monitor leading economic indicators from 23 countries. Leading economic indicators are deteriorating not only in the United States but across the globe. This is a negative for the bulls.
• Are you concerned about the U.S.’s $22 trillion federal debt and the trillion-dollar-plus deficit? Start worrying more because governments across the world are awash in debt. This is a negative for the bulls.
• Would you believe there is a bigger problem than the debt incurred by the governments? It is the huge amounts that corporations have borrowed. This is a negative for the bulls.
• The market is controlled by the momo (momentum) crowd. This is a huge positive for the bulls because the momo crowd is usually buying, ignoring everything else.
• Mom-and-pop investors have been brainwashed into believing that every month they need to send money into the stock market and somehow they are entitled to making huge profits. This is a huge positive for the bulls. Please see “Investors are forgetting that the stock market owes them nothing.”
• Interest rates are relatively low. This is a positive for the bulls.
• Inflation is relatively low. This is positive for the bulls.
• There is significant industrial and technical innovation taking place. This is a positive for the bulls.
• Central banks stand ready to print money to support the markets. This is a positive for the bulls.
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Positives and negatives
How do you combine the above facts — and many more that are important but not listed — to reach actionable conclusions? Here are a few actionable items:
• How much to invest in stocks?
• How much to invest in bonds?
• How much cash to hold?
• How much to hedge?
• Where are the best opportunities geographically?
• Which stocks and ETFs to buy and which ones to sell?
At The Arora Report, we use the ZYX Allocation Model to accomplish the task. Please click here to see how it is done.
What to do now
If you believe Republican politicians, the simple course of action is to load up on popular tech stocks such as Apple AAPL, -0.98% Amazon AMZN, -0.08% and Facebook FB, -0.80% Alternately, keep sending money to passive ETFs and mutual funds.
If you believe Democratic politicians, go all in on cash and possibly learn how to short-sell; also, consider gold ETF GLD, -0.56% silver ETF SLV, -0.81% and investments outside the U.S.
What if you don’t believe politicians from either side? Then you need to do some independent thinking. There are always good investment opportunities — you just have to find them.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.