midyear market 1

We are nearly through the first half of the year. We have survived the vicissitudes of five months of the Trump presidency. Except for the Watergate years, the amount of news devoted to reporting of scandals and other political incidents has been unprecedented.

Meanwhile, the frequency of terrorist’s events throughout the world but especially in Europe has increased. France, who thought themselves too nice to be a target of terrorism has been the target of several of the worst incidents. The frequency of terrorism – especially attacks initiated by citizens of the country that is being terrorized – has increased around the world.

As I predicted last year, terrorism events have become so commonplace that they are now ignored by the markets. This suggests that these incidents have become part of everyday modern life. How sad.

At the same time, new threats in the area of cyber security and cyber warfare have emerged. Ransomware has emerged as a new threat to countries and businesses. Cyber breaches – either as part of terrorism or good old fashioned criminal activity – are on the increase.

My sense is that the next terrorist event that shocks the world and causes economic disruption will be an attack on the electrical grid or some other major infrastructure. Such an event will attempt to show the precariousness of the modern world and the vulnerability of capitalism. While preventive measures are constantly being installed, this type of event is, unfortunately, probably inevitable.

Trump and his administration seem to have elevated the US response and the world response to ISIS. This brutal and evil caliphate has been reduced to holding two areas of Iraq and a section of Syria. Much of their fundraising capability has been cut off. However, their ability to recruit people around the world via the internet and then brainwash them into attacking the country they are a citizen of has not diminished and actually seems to be increasing.

Events in Washington continue to be more than a mess. Any political capital that Trump had coming out of the election has been lost. It seems a long time ago that Trump promised the most productive first one hundred days in the history of the US presidency. Sadly, he has spent most of the beginning of his presidency defending himself against self-inflicted charges and the political hate of liberals.

The result, at least for the near future, is a president and a congress that is incapable of addressing any of the significant problems that the US faces in the next five to ten years. No action has been taken on healthcare reform, infrastructure, immigration, tax cuts or any other significant issue. Apart from a few targeted executive actions, the Trump presidency has been effectively impotent.

Fascinatingly, the stock markets around the world continue to climb. Remarkably at the same time, interest rates remain low. Either investors must believe that suddenly everything will get better or at least that the situation won’t get worse. Unfortunately, my view is that the investment community has the vision of an ostrich with its head buried in the sand.

Why? Because there are many long term economic issues that are not being addressed. But if the Central Banks continue to artificially engineer low interest rates, the stock and bond markets of the world will continue to value assets at unsustainable levels.

There will come a day of reckoning. It’s inevitable. But there is no sign of this currently on the horizon. However, it is likely that the issues with Trump’s presidency will cause the markets to underperform in the second half of 2017. Whether it is the daily press attacks, unending scandals, or the ineffective Republican Congress, at some point the optimism by investors about what Trump was going to accomplish is likely to fade away. When it does, the market will stop going up and likely drop to levels that are supported by mediocre corporate earnings.

There is little evidence that Trump will be able to solve any of the problems he made the focus of his campaign. Except for healthcare, none of his proposals have reached the legislative stage. While healthcare has been partially addressed, it is a long way from new legislation being passed.

The longer it takes for Trump and the Republicans to figure out how to govern, the less likely it is that any of our serious problems will be addressed. In fact, he is well on his way to a highly ineffective presidency.

Meanwhile, the status quo lives. The lack of productive action in Washington led by Republicans has begun to resemble the ineffectiveness of the Obama presidency. The markets will continue to ignore the long-term future as long as our existing political leaders do.

Until the next economic crisis, which is likely several years off, the markets will continue upward. Not without temporary setbacks, but without anything but small “corrections.”

Bottom-line, the “No alternatives” stock market of the Obama years will continue. Low interest rates, decent annual stock market returns and a healthy real estate market will go on and on.

But one day, the long term economic issues that no one wants to talk about will surface in a way that cannot be ignored. And when that happens, the economic fairy tale we are living now will end in a catastrophic way. Those who recognize this will be better off in the long run.