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Wall St turbocharged rally is bet on Trump policies

“Stock market hits new high with longest winning streak in decades. Great level of confidence and optimism — even before tax plan rollout!” Donald Trump tweeted this week.

It is a statement that goes beyond the president’s usual rhetoric. Indeed, Wall Street had a record-setting week that included the four key US stock benchmarks — the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite and the Russell 2000 of small capitalisation stocks — not just hitting further highs but each closing at a record level for four consecutive days. It was a feat last achieved in June 1995, according to FactSet.

The “Trump trade”, “Trumponomics”, or “Trumpflation” that accompanied the surprise election of Mr Trump in November bolstered a bull run in US stocks that turns eight years old in March. The thinking is that his proposed combination of tax cuts, infrastructure spending and deregulation would easily pass through a Republican-dominated Congress, boosting economic and earnings growth.

Some of the market’s biggest names, such as Apple and Goldman Sachs, hit further highs this week, but the gains have been broad-based, with small-caps even joining after lagging behind their larger counterparts this year.

The latest leg in the rally came even though investors are awaiting details and approved plans on Mr Trump’s objectives. He has, for example, promised a “phenomenal” tax plan, but it has not emerged yet. This week was also marked by political turmoil for the president in the form of the high-profile resignation of his national security adviser and persistent criticism of dealings with Russia, capped off by a combative press conference on Thursday.

Underpinning the rally, investors say, is increasing confidence in the US economy and corporate earnings that had been building even before Mr Trump’s election and is, for now at least, outweighing fiscal and political uncertainty.

Paul Quinsee, global head of equities at JPMorgan Asset Management, points to the starkly different picture from the current environment versus a year ago when the US stock market touched the lows of a dramatic sell-off on fears of global economic recession and a rout in oil prices. If an investor bought the S&P 500 then, they would be sitting on a return of about 30 per cent.

“Since then, markets have been going up as economic growth was improving, commodities prices recovering and profits have started to recover as well. All of that is a great background for equity investors,” Mr Quinsee says. “The big accelerator to this in the US was the election which just pushed investors even further in the direction of believing that rather than face a recession it would be continued economic recovery.”

The US is forecast to have grown at an annualised pace of 2.4 per cent in the first three months of this year, an acceleration from the 1.9 per cent rate in the fourth quarter of 2016, a running calculation by the Atlanta Federal Reserve shows.

Meanwhile, Citigroup’s economic surprise index this week hit its highest level since early 2014 — indicating that incoming data have consistently exceeded Wall Street’s expectations. 

“The US economy continues to sustain solid momentum. Though growth remains modest by historical standards — largely due to the economy’s diminished potential — it is enough to enable continued progress in healing labour markets,” Joshua Feinman, chief global economist at Deutsche Asset Management, says. “Indeed, that progress seems nearly complete, with the economy approaching full employment, perhaps not quite all the way there but undoubtedly closer than at any time since the financial crisis.” 

After snapping a five-quarter string of declines in the third quarter, earnings growth for last quarter is forecast at 4.6 per cent, according to a blended rate of reported and forecast earnings calculated by FactSet. That is up from expected earnings growth of 3.1 per cent for the fourth quarter at year end.

For JJ Kinahan, chief market strategist at TD Ameritrade, the big take away from this earnings season is not even how many companies have beaten expectations. 

“It’s the tone of the conference calls,” he says. “CEOs are talking for the first time in a long time about long-term growth.”

JPMorgan chief Jamie Dimon, for example, said: “The US economy may be building momentum. Looking ahead, there is opportunity for good, rational and thoughtful policy decisions to be implemented, which would spur growth, create jobs for Americans across the income spectrum and help communities, and we are well positioned to play our part.”

For others, weathering the tumult of 2016 has emboldened investors as well.

“There is a sense of confidence that the market was able to live through Brexit and the Trump election and see through both events to focus on earnings and economics,” says Nicholas Colas, chief market strategist at Convergex. “There is a certain feeling of confidence that equities are underpinned by something durable.”

Still, it has been the hopes of stimulative, pro-business policies of the Trump administration that turbocharged the rally in recent months. At some point, investors will demand the formal plans.

“Everyone understands things take time in [Washington] DC,” Mr Colas says. “Eventually markets will not give the administration a pass if they can’t pull together the economic plan.”

The question is when? 

Additional reporting by Mamta Badkar

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