For some, it might be hard to remember a time before Google Maps and modern, commercial GPSs…
However, I distinctly remember what it was like to have to give verbal or written directions to our home.
We live in a small university town in Delaware that was founded in the late 1600s.
And, like many colonial towns, the roads that leave the center of town quickly diverge.
That means, if someone heads to our house on the wrong road, they head away from us pretty quickly – a problem we ran into quite frequently.
However, as I gave directions time and again – and got feedback on how easy it was to find our place, a pattern emerged.
After travelers left Main Street and headed out of town toward our house, there was a period of trepidation while they figured out if they were on the correct route.
That’s when I realized something…
The folks trying to navigate their way to our house needed a signpost – a landmark that would remove any anxiety that they were headed in the right direction.
Our nearby country club was the first thing to pop into my mind.
Its vast, beautiful, and distinctive golf course is only a half mile out of town and is nearly impossible to miss.
With such a clear visual confirmation built right into our route, I was able to arm our incoming guests with a concrete cue that they were on the right path – eliminating any unease they might have had.
As investors, that same kind of pre-GPS signpost can be incredibly helpful when we look at the financial markets.
Especially when we are dealing with a narrative that is “in transition.”
Over the weekend, I explained how the narrative is evolving.
And today, I want to show you some signposts you can look out for along the way to let you know we’re headed down the right path.
But first, let’s take a look at where we are right now…
A Narrative in Transition
Since the presidential election last November, the market has been completely focused on the Trump Growth narrative.
|Need to Get Caught Up?Did you miss D.R.’s recent video about our “in transition” narrative? You can watch the full video here.
Optimism over the three-fold promise of lower taxes, reduced regulation, and increased infrastructure spending have spurred the markets upward.
Any news that supported this narrative has pushed the market higher…
And any news that ran counter to this narrative (chaos in the administration, thwarted legislative measures, bickering Republican congress members, etc.) has caused a brief, small market pullback followed by a quick rebound.
Right now, this is still the dominant narrative.
But, as we’ve seen over the past few months, the next market narrative is already starting to exert its influence…
In June, the Federal Reserve not only raised interest rates by ¼ of a percent, they also signaled their intent to start what I call “The Great Unwind,” the reduction of their balance sheet assets from $4.5 trillion down toward the 2008 level of $800 billion.
This new narrative will bring big price swings (what Wall Streeters call volatility) back to the markets.
But that narrative has not yet taken center stage.
That leaves us in a transitional period that I talked to you about in my recent video.
In your weekend video update, I showed you a hand-drawn diagram to help you understand how the narrative is evolving. Through the magic of software, here’s a screen capture of that visual:
As I said above, the Trump Growth narrative is still the market’s main mover, but that will transition as The Great Unwind plan becomes more concrete.
That leaves us with the same quandary as my pre-GPS visitors…
We know where we’re going, but how can we tell we’re making progress in that direction and that we’ve arrived?
Here are some signposts that will allow us to know when the narrative has shifted for good…
Narrative Signpost No. 1 – How Does the Market Digest Important Economic News?
In the Trump Growth narrative, good economic news sends the market higher, while bad economic news sends the market lower.
In The Great Unwind narrative, the opposite is true.
Good economic news will send markets lower because traders and investors will fear quicker or bigger action by the Fed.
Meanwhile, bad economic news will drive markets higher because market participants will anticipate that bad news will delay any tightening actions by the Fed.
Narrative Signpost No. 2 – How Does the Market React to News About the Trump Administration or Congress?
In the Trump Growth narrative, any news about the lack of efficacy in the White House or on Capitol Hill will push the market down.
News that makes the president look more “presidential” or is supportive of key staff members will push markets up.
In The Great Unwind narrative, news about the Trump administration, in particular, will have little to moderate effect on the market.
Just in the past week, we’ve had a great example of how this is playing out…
On Friday, August 4, we got the monthly employment report.
The initial market reaction to this good news (209,000 jobs added – more than the 180,000 expected) was up.
So folks aren’t yet worried that this will cause the Fed to start The Great Unwind sooner.
This is one of the clearest market signals that we could get…
As long as good economic news equals good market reaction, we’ll know that the market still has optimism for the Trump Growth agenda and a grinding upward bias for stock prices.
When good news starts to give us a bad (down) market reaction, we’ll know that traders and investors are starting to worry more about when the Fed will start The Great Unwind and less about growth initiative.
Then it will be time to circle the wagons and look for much faster market moves – both up and down.
And we’ll be ready – and well positioned – to profit from it when that volatility comes.
Rest assured, as we move through this transitioning narrative, I’ll be right here to guide you down the path that will grow and protect your wealth.
We’ll take each day one step at a time until you’re enjoying the lifelong wealth you’ve always dreamed of.
D.R. Barton, Jr.