On November 9, the day after the US Presidential Election, I wrote a blogpost regarding market responses to the surprising Trump victory. It was an extraordinary day for markets as portfolio managers, institutional investors, traders, etc. scrambled for dividend-yielding stocks after pulling out of safe-haven investments. That marked the first day of Trumpflation, which famously led the DOW (DIA) and S&P 500 (SPX) to a 109-day streak without a decline of at least 1%. Both indexes were able to continue their streak even after the Feds raised interest rates to 0.75–1.00%. In fact, US stocks closed higher due to rebounding oil prices and the dovish, cautious behavior of the Feds. However, the streak ended on Tuesday, March 21, and questions arise as to the longevity of the Trump-inspired bull market.
In response to these questions, there seem to be three main camps: 1) those who believe that the bull market will die soon, 2) those who believe that the bull market will continue and 3) those who believe that the recent events only warrant skepticism of, but not a retreat from, the market.
Those in Camp One believe that stocks are currently overvalued because of its rise through Trumpflation, which manifests the expectation that a massive stimulus was underway (i.e. tax cuts, increased infrastructure spending, and deregulation). The Trumpflation rally is faced with increased doubts as to the execution of stimulus-related legislation (investors are becoming skeptical because of the “Dead On Arrival” status given to Trump’s healthcare legislation, his decreasing approval rating that also decreases his political capital, and an infrastructure plan that one columnist believes “may not happen at all”). Thus, people in camp one argue that stocks have been priced with the expectation of stimulus, and since the chances of stimulus are currently low, stocks are overvalued and due for a 5-10% correction.
Those in Camp Two, on the other hand, believe that stock prices are not overvalued despite the significant amount of people in camp one. People in Camp Two assume that “Enduring bears [won’t] destroy you, provided you capture all the bull markets.” Furthermore, they sustain their optimism by referring to historical trends of the US stock market (i.e., markets in the 1990’s experienced hundreds of record-breaking climbs) and by blaming bad valuation tools. Thus, people in camp two are bullish and will continue to buy.
This takes us to our last camp, which is the group of people who are skeptical of the bull market, but who won’t take their skepticism so far as to decry the bulls. This group believes that growth is scarce and that the Trump rally lasted too long, yet also believes the US is in a better position than it would be if the rally was ongoing. With a weaker dollar, stronger emerging markets and the lessening of a bubbling stock market, members of Camp Three argue that the US is, in a way, financially healthier.
Personally, I find myself in Camp Three. Recent events, such as the Feds raising interest rates, the hung-over market on Tuesday, fears of less earnings due to lack of confidence in Washington’s ability to provide stimulus, revelations of massive subprime auto loan losses, an unexpected decrease in housing sales and a falling long-term treasury bond yield that undermines bank profits, all advance the notion that the stock market is due for a correction. However, the S&P 500 closed a bit higher on Wednesday, despite the uncertainty of the outcome of the healthcare bill (being voted on today). At the same time, continued positive unemployment reports, emerging markets no longer spiraling into crisis due to a weaker dollar and a recent census finding of a 5.2% increase in median household income during 2015 all point towards generally favorable economic conditions.
In conclusion, my stance is: let’s wait and see. If stimulus expectations are already priced in the shares; if confidence is shaken to correct share prices; and if Washington passes a stimulus package eventually (which I’m confident it will), then share prices will eventually increase due to the increase in expectation of higher earnings. Inevitably, Republicans will be able to pass tax cuts or a different stimulus. This could mean that increased infrastructure spending may be off the table, but Republicans tend to be in favor of reducing the role of government anyway. Thus, even if Trumpcare dies in Congress, Washington will still play a role in boosting share prices.