Stocks Press Forward, But It's No Longer A "Trump Trade"
In the months leading up to the election, experts, economists and almost anyone with a platform predicted a Donald Trump victory would wreak havoc on the global economy. After all, the market hates uncertainty, so it’s understandable that Wall Street took a skittish stance to the President’s colorful rhetoric.
And yet, even more surprising than the victory itself, the stock market accelerated in the wake of November’s election. All three major indices rallied over 10% year to date and continue to record new all-time highs on a daily basis.
At first glance, companies expected to receive a boost from President Trump’s campaign promise to strip Dodd-Frank, pass a massive fiscal stimulus bill and cut taxes for Corporate America. The prospect of the administration moving swiftly on this pro-growth agenda incited a thunderous rally in financials, industrials and other cyclical sectors.
But lately it’s unclear if a substantive bill will get passed before the administration handles geopolitical tensions with North Korea, meaning the ongoing bull market is likely a result of the global economic recovery and other forces outside of Washington.
After a decade of lagging the US market, international equities have started to attract greater investment flows independent of the roaring bull market at home. In fact, almost 40 country exchange traded funds (ETF) have outperformed the S&P 500 (SPX) this year as investors bet on international markets to close the performance gap between US equities.
Meanwhile, economic growth in many parts of Europe and Asia now outpace domestic growth for the first time since 2008. With the jump in growth, analysts expect corporate earnings in Europe to eclipse 12 percent for the entire year. In spite of this momentum, prices overseas still look cheap compared to the United States where traditional valuations have inflated to dot com bubble and Great Depression levels.
That said, the favorable economic backdrop and improved risk conditions around the world presents an encouraging opportunity for most markets to rip another leg higher.
But other factors continue to support the run in the US; chiefly a broad bounce back in corporate earnings. After five straight quarters of declines, corporate earnings turned the corner in late 2016 on the back of a strengthening global economy and a waning US dollar. First quarter 2017 results ended with a 15 percent jump on the bottom line and top line growth of about 8 percent as multinationals celebrated greater foreign sales.
As of last Friday, second quarter numbers are showing similar success; 73 percent of all S&P 500 companies reported a positive EPS surprise equal to 10.2 percent earnings growth. Both energy companies and global multinationals played a significant role in the earnings recovery, while telecom is the only sector to report year over year declines.
Besides dollar weakness, U.S. stocks rallied on the bounce in oil from last February’s lows and continued optimism from the Federal Reserve to hike rates. In theory, rising rates should depress equities because fixed income instruments look more attractive, but really, they move in tandem. The conditions that often lead to further rate hikes— an acceleration in productivity, job growth or inflation—also fuel bull markets whereas rate cuts can signal an impending downturn.
Indeed, solid fundamentals helped trigger the latest rally, but investor psychology will keep it from rolling over. When the market records an all-time high every other day investors start to fear missing out on potential gains and ramp up buying activity. This trend is particularly evident when you look at the performance of the S&P 500, which is trading in a tight ascending channel without a significant drawdown in the past 8 months. Unless prices break below the trend line, the major index is poised for a run at $2500 in the coming weeks.
While the rally continues to gain momentum without the Trump administration, they do have an opportunity to shape future market trends through legislation. Though if a bill passed tomorrow, it would take the economy a year or longer to fully recognize it as a growth driver. For the time being then, investors can sit back and enjoy the historic bull market in stocks.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.