Corporate profits robust so far
and oil and gas, a weaker dollar that helps exporters, and a lighter regulatory touch by the new administration.
The initial stock market rally that followed President Donald Trump’s victory in November — the so-called Trump bump — was fueled by optimism among investors that long-sought action on tax reform and infrastructure spending might finally be at hand.
Few analysts are so sanguine now, especially after Republicans could not agree last month on how to repeal the Affordable Care Act, after years of promising to do so. If anything, simplifying the tax code or investing in new roads and bridges seems further out of reach than ever.
But a market surge based on political hopes has been replaced by one more firmly grounded in the financial realm.
Besides steady economic growth or less regulation, investors also have been encouraged by the loose reins of central banks like the Federal Reserve, which have helped keep interest rates not far above their historic lows. Inflation, too, remains tame, with price increases in recent months actually falling short of the Fed’s targets.
At the same time, with yields on safe assets like government bonds so minuscule, there are few appealing alternatives to stocks for investors, according to Torsten Slok, chief international economist at Deutsche Bank.
“No matter how you look at valuations, they are high,” he said. “But as money flows into pension funds every month and needs to be invested, why would I put it in bonds?
“Corporations in America and Europe are still inventing new products and finding ways of doing things more efficiently,” Slok said. “This is separate from the political theater around the world.”
Moreover, corporate earnings — the fundamental driver of individual stock performance — have been robust.
The strength has spanned sectors ranging from technology to restaurants, as seen in the rise of almost 5 percent in Apple’s shares on Wednesday, or McDonald’s jump to a record high last month. Both are Dow components.
“The first six months of the year have been the best period for earnings growth since 2011,” said Phil Orlando, chief equity strategist at Federated Investors. Correction ahead?
Still, many Wall Street investors who are bullish over the longer term, including Orlando, concede that the risk of a stock market correction was rising.
“We’ve had this fabulous run since the election,” he said. “But could we see an air pocket in the next few months? Absolutely. Our best guess is that the next 5 percent move is more likely to be down than up.”
Investors have also voiced concerns that trad- ing has been unusually placid — volatility recently sank to a two-decade low, and Wall Street has not had a correction, usually defined as a drop of 10 percent or more, since early 2016. With the current recovery entering its ninth year this summer, a recession seems inevitable.
But for now, whichever way the stock market goes, most economic metrics like hiring, consumer sentiment and home prices continue to point in the right direction.
Those trends predated Trump’s taking office, although he took to Twitter several times this week to claim credit for the stock market’s run and soaring earnings.
Still, Sullivan of RPM said that while he did not vote for Trump, he gave the president credit for setting a new political tone toward corporate America in Washington.
“I’m in the middle of it in Cleveland, and small businesses are looking forward instead of over their shoulder,” said Sullivan, who is the older brother of Sen. Dan Sullivan, R-Alaska. ‘Do no harm’
“When Washington practices the Hippocratic oath toward business — first, do no harm — it’s amazing what the American economy can do,” he said. “Under the prior administration, you had a very, very aggressive regulatory environment in which businesses felt under attack.”
Easing regulation is also something Trump can do with the stroke of a pen or with appointments to agencies like the Securities and Exchange Commission or the Federal Reserve, which require confirmation but not legislation.
Bank stocks, for example, have been among strongest performers on Wall Street since the election, and the trade might be paying off: Regulators could soon weaken the Dodd-Frank Act’s Volcker Rule, which restricted the ability of banks to make financial bets with their own capital. Few own stocks
To be sure, the glow from Wall Street extends only so far.
According to the Federal Reserve’s most recent Survey of Consumer Finances, less than 15 percent of American households owned individual stocks and only half had any exposure to the broader market, including through mutual funds or retirement plans.
“Only people with assets like stocks and houses are benefiting, and that’s why this recovery has been weak,” Slok said.