Overcoming Trump uncertainty
Indexes keep soaring despite many unknowns about president’s tax, regulation and trade policies
It’s often said the stock market hates uncertainty, so one might assume Wall Street would be very skittish about President Trump.
Far from it, at least for now.
Stock prices have continued setting record highs as investors brushed aside Trump’s controversial policy actions in his first month in office and the uncertainty about how his planned agenda of tax, regulation and trade reforms will play out, even though they see that pro-business agenda as bullish overall.
The gains have been broad-based, with sectors such as financials, consumer goods, technology and healthcare all advancing.
“This rally is lifting most of the boats, and that’s something we always like to see,” said John Bollinger, president of Bollinger Capital Management Inc. in Redondo Beach.
But warning lights are flashing about the market’s ability to sustain the trend, even setting aside the possibility of an unexpected move by the White House or a global event that could rattle investors, some analysts said.
For instance, stocks are getting increasingly rich by historical standards relative to profits. The market inevitably will need to pull back, or “correct” itself as traders take profits, analysts said.
Analysts also believe a large part of any benefit from Trump’s plan to cut corporate tax rates and pare regulations already is “baked into” share prices.
“We are approaching the point of maximum optimism regarding [Washington] policy initiatives,” Goldman Sachs Group Inc.’s market analysts warned in a recent note to clients.
For now, though, the market’s performance has been impressive by several measures as Wall Street extends its years-long bull run that mostly occurred during the Obama administration.
The blue-chip Dow Jones industrial average has set record highs for 11 consecutive sessions — the latest was an 11.44-point gain to 20,821.76 on Friday — the first time that’s happened in 30 years.
The Dow set record highs for 12 consecutive sessions in early 1987. The last time the average rose 11 consecutive sessions overall was in late 1991 into early 1992.
The Dow has climbed 5.4% this year, and it has surged 13.6% since Trump was elected Nov. 8.
The benchmark Standard & Poor’s 500 index also hit an all-time high Friday of 2,367.34, and it’s up 10.6% since the election. The technology-heavy Nasdaq composite index reached a record high of 5,865.95 on Feb. 21.
At least four major factors are helping drive prices higher: rising corporate earnings, global economic growth, continued low interest rates and expectations that Trump’s call for tax and regulatory cuts could further swell earnings.
Trump, naturally, is delighted. “Stock market hits new high with longest winning streak in decades,” the president tweeted recently. “Great level of confidence and optimism — even before the tax plan rollout!”
New Treasury Secretary Steven Mnuchin told CNBC last week that the stock market’s gains “absolutely” were a vote of confidence about the Trump administration’s efforts.
Fresh cash from investors keeps pouring into stocks.
Vanguard Group Inc., the giant mutual-fund operator known for its funds that track stock indexes, reported $27.5 billion in net cash inflows for its U.S.based funds in January — a record one-month sum for the company and a 23% increase from January 2016.
But corporate profits will need to keep growing to justify the higher stock prices. For instance, the price-toearnings ratio of the stocks in the S&P 500 currently is 21.7 for the trailing 12 months, well above the historical average of 15.5, according to research firm Birinyi Associates.
That ratio drops to a more reasonable, if still frothy, 18.2 when looking at the S&P 500 earnings expected for the next 12 months, which might include the initial benefit of reduced tax rates, Birinyi estimates.
Mnuchin said last week that the White House wants to overhaul the tax code by August, but it remains unclear whether the changes would apply to 2017 earnings.
Although details of Trump’s tax-cut plan have yet to be revealed, “the latest headlines out of Washington and actual earnings results have given us no reason to change our belief that policy changes may add meaningfully to earnings growth once implemented,” Burt White, chief investment officer of LPL Financial, said in a report last week.
Bollinger said that although the timing of those policy changes remains unknown, investors are unshaken in their belief that they’re coming.
“The stock market believes that less regulation is going to mean more growth, and the Trump administration so far has stayed really strong on that message,” Bollinger said. “The message has not varied one whit.”
Others agreed but noted that the gains from any Trump policy changes won’t come quickly.
“We expect investors will soon de-rate their expectations” of earnings growth in 2017 “as they face the reality” that a positive effect from tax reform “will not occur until 2018,” the Goldman Sachs analysts wrote.
In the meantime, the U.S. economy has been giving off mixed signals. The economy overall grew at a tepid annual rate of 1.9% in the fourth quarter of last year, and some economists expect that growth to increase to 2.2% or more this year.
Job growth picked up in January, and existing home sales rose in January at the fastest pace since 2007. But industrial production fell in January, led by a drop in utilities’ production because of unseasonably warm weather.
Stocks are unlikely to be derailed by a surge in interest rates, with the Federal Reserve Board expected to lift its benchmark shortterm rate by only modest amounts two or three times the rest of the year. The rate now stands at 0.5% to 0.75%.
Bond prices have fallen, and their yields have risen, amid speculation that rates and inflation will climb as the economy shows added growth.
The yield on the 10-year Treasury note, for instance, stood at 2.31% on Friday, up from 1.85% when Trump was elected. But as rate fears have ebbed in recent weeks, that yield has drifted down from 2.52% a month earlier.
David Dietze, chief investment strategist at Point View Wealth Management Inc., nonetheless said, “We remain cautious” with stock prices at current levels.
“There’s been much buying on the promise of tax reform, regulatory relief and infrastructure spending, yet the details and the timing remain unclear,” Dietze said in a note to clients last week. “Investors risk buying on the rumor and may be disappointed when they see the actual plans.”
Dietze added another warning to investors that could apply only to the new era of a Trump White House: “Concern, too, surrounds the unpredictability of Mr. Trump, with any comment or tweet having the potential to cause market participants to have second doubts about this presidency.”
‘The stock market believes that less regulation is going to mean more growth, and ... Trump ... so far has stayed really strong on that message.’ — John Bollinger, president of Bollinger Capital Management