The stock market roared higher on Monday because Macron appears to have locked up the French presidential election. He beats Le Pen in all the polls by at least twenty points. This makes me wonder what it takes for stocks to fall. Stocks rallied after the populist wins which were Brexit and Trump. They then rallied on the establishment victory by Macron. This supports my thesis that stocks would have rallied if Hillary won the U.S. election. Stocks go up on good and bad news. The rally in U.S. equities on Monday makes no sense because the 3% mini correction was not caused by angst over the French election. The stock market fell because of weak macroeconomic data. Now the market is barely down off its all-time high even though the data is lousy. The Nasdaq actually hit a new record high on Monday. I’m not surprised Macron’s win caused a rally because it is what the market wanted. I expected the market to irrationally ignore the disappointing economic data.
The chart below shows the weak data which I mentioned. The Citi U.S. economic surprise index has showed the positive economic trend of surprises has ended quickly. I have showed this chart in a previous article. The new point I’d like to mention is that the index is likely falling because of base effects. As you can see from the chart, the beginning of 2016 had awful economic data. At that point, many, including myself, were expecting the economy to fall into a recession. Coordinated global central bank dovishness prevented a fall. This caused the April 2016 economic data to improve, which is partially why the economic surprises this April are falling. The reason this chart looked so great in Q1 is because of the soft data. The soft data and the hard data have both retreated lately, sending this index down sharply.
Another reason why the market rallied towards the end of the day is because of rumors surrounding Trump’s corporate tax cut plan. It’s being reported that Trump wants the corporate tax rate to be cut to 15% to make it look like he’s delivering a big win to the voters within his first 100 days in office. Stocks shouldn’t be rallying on this report because Trump wanting it doesn’t mean it will happen. An analogous situation would be a poverty-stricken parent telling its child that it will get a Lamborghini for its 16th birthday. The child would be smart enough to know that the family can’t even afford to rent a Lamborghini for the weekend, let alone buy one outright. The stock market is not as rational as the 15-year-old child as it is believing reports which aren’t economically or politically feasible.
