There has been an increase in stock prices since the election based on optimism about the Trump administration. Investors focused on the potential tax cuts, regulatory reform, healthcare reform, and infrastructure stimulus. The fact that investors were swooning over a politician’s rhetoric showed how far the hope trade had gotten in this cycle. The chart below shows the hope trade in action as soft survey data has spiked higher along with the market. Both stocks and surveys are based on sentiment. Usually they are rooted in reality, but hope reigns supreme when businesses and investors see a future catalyst to improve the economy. This vision of a future catalyst has been a mirage as hard data still hasn’t caught up. In fact, it has fallen recently.

The most blatant example of this hope was seen when investors bought stocks after Trump’s speech to Congress on the basis that there weren’t many specific details. In all my years of investing, uncertainty has been viewed negatively, but this time the logic changed. The reason uncertainty hurts stocks is because it hurts business’ ability to operate efficiently. Businesses may act more cautiously than necessary when uncertainty prevails.

The two scenarios which can cause businesses to act cautiously is when the economy enters a recession and when government policy is uncertain. Recessions hurt expansions because it’s tougher to get a loan during them and because demand is falling off so sharply that it’s tough to model it using sensitivity analysis. Investors reward the firms with the most solid balance sheets and the most conservative growth plans during recessions. It’s the exact opposite during expansions where investors reward the businesses taking the most risk. That’s why it’s best to have a happy medium between aggression and conservatism.

Recessions are usually a short period where growth turns negative. They end after a few quarters and then growth resumes. When governments put initiatives on hold, it can be worse than recessions because government acts slowly. It can take years for the government to make a decision. That was seen in the decision to allow the Keystone XL pipeline to break ground. By the time the pipeline was approved, it wasn’t even needed. The oil started getting shipped by rail. There’s also a glut in oil production as oil has fallen sharply in the past few years. If you can believe it, the plan was proposed in 2008 and Trump approved it in 2017.