Stocks are melting up. The S&P is up over 11% since early November representing tremendous optimism by traders. The stock market acts as a forward-looking predictor of corporate earnings. And since Trump has been in office he has vowed to make changes that should greatly augment earnings. These mainly have to do with “massive” tax cuts for both individuals and companies, and the removal of regulations and protections in order to maximize profits. Alongside future expectations, the current economy is chugging right along.
On Valentine’s Day, Federal Reserve Chair Janet Yellen held her monthly testimony on Capitol Hill – or more accurately her sit down and get yelled at and blamed for all things financial by grandstanding politicians. She was asked if the market seemed overly optimistic of late and her answer though guarded, pointed out why traders might feel that way. The GDP in the US grew by 1.9% in 2016, same as 2015. Inflation is still relatively very low around 2%. The labor market has improved dramatically in the last 9 years as the unemployment rate stands at 4.8%. Additionally, the Fed will continue to buy US Treasury Bonds supporting the bond market and keeping interest rates relatively low for the foreseeable future.
A market pull back could come at any time and indeed will. It is not uncommon to see short-term sell-offs of 3-5%. Nonetheless, market fundamentals remain strong and the overall strength of the uptrend is telling us economies are on the right path. We remain vigilant and are always on the lookout for any indication that a downtrend or recession is ahead. But as of now both economic fundamentals and asset price trends show we are a while away from any real danger. Something to look out for is how the markets react to rising interest rates. The Fed chairwoman made it clear she would raise rates in an orderly fashion, but how the market responds will be constantly evolving. One thing we know for sure is that every move this presidential administration intends to make is inflationary (lower taxes, increased spending on infrastructure, tariffs on imports, etc.). This could cause the Fed to raise interest rates at a faster clip than they would like and would almost certainly cause a sell-off in stocks and hamper growth. The market is anticipating steady economic expansion and traders seem to believe Trump’s fiscal initiatives will move forward but be tempered (by congress or whomever) and there will not be an explosion in deficits or spending or inflation. This will all be something to keep an eye on.