Published March 23, 2017

Tuesday’s Pullback Was Just a Taste of What’s to Come…

By Justin Spittler

The honeymoon is over…

When Donald Trump won the U.S. presidential election, something unexpected happened.

U.S. stocks took off.

Two days after the election, the Dow Jones Industrial Average set a new all-time high. Two weeks later, the S&P 500 did the same.

But the rally didn’t stop there.

The Dow, S&P 500, and NASDAQ have all climbed more than 12% since Election Day.

The rally in U.S. stocks was so big that the media started calling it the “Trump Bump.”

• No one saw this coming…

Remember, Trump was the clear underdog heading into Election Day.

In the off chance that Trump did win, everyone thought stocks would crash. The exact opposite happened.

It’s easy to see why in hindsight. During the election, Trump said that he would peel back regulations and cut taxes.

This got investors excited. And when Trump won, they loaded up on stocks…and the Trump honeymoon began.

But remember… Honeymoons don’t last long.

Before newlyweds know it, their two-week vacation in Maui is over. They have to pack their suitcases, check out of their five-star hotel, and go back to wherever they came from.

When they return home, they go back to work. They have to worry about bills again. They have to face reality again.

• That’s exactly what the markets are going through right now…

The S&P 500 hasn’t set a new high in three weeks.

On Tuesday, it plunged 1.2%. It was the worst day of the year for U.S. stocks.

Now, down days can be a good thing. After all, stocks often need a chance to catch their breath before heading higher.

Plus, the U.S. stock market was long overdue for a pullback.

Before Tuesday, the S&P 500 had gone 109 days without a 1% decline. That’s the longest streak without a big drop since 1995.

But I don’t think Tuesday’s pullback was a routine selloff.

Instead, I think it could be the start of something much worse.

I’ll explain why in a second. But first you have to understand why the rally in U.S. stocks died off.

• Investors have dialed back their expectations…

To understand what I mean, look at the chart below.

It shows the performance of the SPDR S&P Regional Banking ETF (KRE) since the election. This fund tracks the performance of 102 regional banks.

You can see that KRE soared after Trump won. It jumped 35% in less than four months.

Regional stocks rallied because many investors thought Trump would dismantle or repeal Dodd–Frank, a major banking regulatory apparatus. But Trump hasn’t gotten around to this yet.

He’s been too busy fighting with Democrats over health care reform. It now looks like it could be months before Trump tackles banking reform. It could take years before any changes go into place.

Investors are finally starting to realize this. That’s why KRE has plummeted 10% over the past three weeks.

One of the hottest "Trump trades" has gone cold.

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• Investors are also rethinking some of their post-election currency trades…

Take a look at the chart below.

It shows the performance of the U.S. dollar since Election Day.

You can see that the dollar soared after Trump won. It actually hit a 14-year high back in December.

The dollar rallied because investors thought the Federal Reserve would raise rates aggressively under Trump.

Now, the Fed has raised its key rate two times since Election Day. But Fed Chair Janet Yellen has sounded especially “dovish” lately.

This tells us that the Fed could take its time raising rates. That’s bad news for the dollar.

The U.S. dollar has now fallen more than 3% since mid-December.

That might not sound like much. But it’s a huge move for the world's most important currency.

• Meanwhile, investors are bullish on gold again…

Just look at the chart below.

You can see that gold has jumped 10% since mid-December. It’s almost back to where it was just before the election.

This is a big deal.

After the election, many investors sold their gold. They didn’t see the point in owning gold if Trump was about to “make America great again.”

It seems that those same investors are now having second thoughts. They’re buying gold, the ultimate safe-haven asset, because they're nervous about stocks and the economy again.

• This doesn’t mean U.S. stocks are going to crash…

For all I know, they could keep chugging along. Only time will tell.

But here’s what I do know. The Trump honeymoon is over.

This means that the market could be much more volatile going forward. We could even see a lot more days like Tuesday in the coming months.

• If you haven’t already, I encourage you to buy some physical gold today…

Even a small position in gold could offset huge losses should stocks tumble again.

Here are two other easy ways to protect your wealth right now:

Use stop losses. A stop loss automatically closes a position when it falls below a certain point. It’s a simple way to keep losses small. I recommend using a 20% stop loss for blue-chip stocks like Apple or IBM. For more speculative stocks, use a 30%–40% stop loss.

Look at your stock portfolio. Get rid of some of your weakest positions. These might include companies with a lot of debt, businesses that need a strong economy to make money, and expensive stocks.

Regards,

Justin Spittler
Delray Beach, Florida
March 23, 2017

P.S. Speaking of Trump…

I recently sat down with Casey Research founder Doug Casey. We talked about a number of topics, including Trump’s proposed budget. Here’s a short excerpt from our conversation:

Justin: Doug, I recently read that Trump wants to cut non-defense spending by $54 billion. That’s the good news.

The bad news is that he’s going to take that money and spend it on the military. What should everyday Americans think of this?

Doug: They should be very disturbed. The US military is one of the most bloated institutions ever in all of world history. The official number for military spending is around $650 billion. It’s probably around a trillion dollars, because of so much spending that is disguised. Then you have the NASA budget, the Department of Energy budget, the Homeland Security budget, the various science budgets, and so forth. The US military—it’s shocking to most people to hear this—is the biggest danger to the average American at this point. Because there’s an excellent chance that Trump is going to start World War III. Not just some sport war against some nothing-nowhere Middle Eastern republic such as Iraq, or Afghanistan, or Libya and Syria where they created this chaos. They’ll go after big game, and start something with the Soviets, or the Chinese, or nuclear Iran.

Instead of raising the military budget by $54 billion, which is provocative, they should be cutting the US military budget in half. Because it’s all borrowed money to start with. It’s nice that Trump wants to cut the EPA budget by about 50%, but the EPA should be abolished, and pulled out by the roots and ground up and sowed out onto the soil with the gruel. Because otherwise, it’s going to grow back. These things always grow back. Trump isn’t going to be in office forever. And the next guy will make its budget bigger again. So I’m so sorry to say this, because Trump has some favorable aspects that I think most of our readers are quite cognizant about. But I’m afraid he’s going to make a disaster out of this presidency from an economic point of view and a military point of view if nothing else.

Editor's note: Doug also recently chatted with Wall St for Main St. In this interview, Doug talks about a number of topics, including why people hate President Trump and why you have to be a speculator today. He also shares more thoughts on the "political correctness movement." Click here to listen now.