By Rob Stein, CEO and Founder, Astor Investment Management
The latest market surge, as the Dow powers toward 20,000, is being called the “Trump stock market rally.” But as an economist and a realist, I have to question whether stocks would rally this much just on hope and expectations for a new administration, without the help of some other catalyst.
Granted, since the election, moves in the stock market have been significant: the Russell 2000 index of small-cap stocks has gained about 20% and the S&P 500 about 8%. Conversely, bond prices have taken a beating, although no one is calling that the “Trump Bond Dump.”
S&P (SPX) 3-Month Chart with 200-day simple moving average (Source: Wall Street Journal)
As I dig deeper into the stock market rally, I believe there is another explanation for the most recent strong upward move in equities. For one thing, we are no longer barraged by the election drama. Uncertainty is gone; we know who won. Minus uncertainty, the market can shake off fear and resume its trend that, prior to the election, had been upward. (Recall that we were at previous all-time highs in the S&P this past summer, propelled higher by an improving employment picture.)
My point here is not to be political. Politics and economics are two very different animals who have to play nice in the jungle. But I do believe that this rally would have occurred no matter who won the election, based on the strength of the current economic fundamentals.
This is not meant to take anything away from President-elect Trump’s plans. Some investors are interpreting the Trump agenda as being supportive of the economy. There are some proposals, however, that could hurt stocks, such as limitations on international trade. In addition, increased spending and lower tax revenue could lead to a larger deficit, while policies that could lead to accelerated interest rate hikes would make it harder for corporations to float debt. And for all his ideas that could stimulate growth (e.g. infrastructure investments) at least in the short run, keep in mind that it takes a lot for anyone to execute a plan into action.