The calls started coming early yesterday morning. The primary question being asked was universal and simple. Why was the Dow up more than 200 points at the open? Yes, Trump did a nice job on the speech, one caller opined. But shouldn't the market be concerned about all the Fedheads talking about hiking rates in a couple of weeks?
So, folks wanted to know, what's going on here? Why are stocks melting up again?
The way I see it, there are five reasons why stocks surged again on Wednesday. So, let's run them down.
Reason #1 - All About Trump
To be sure, the markets were focused on what Trump had to say on Tuesday night. There were questions if the new President still planned to make good on certain campaign promises such as an economic stimulus package. There were concerns about how far Trump would push his protectionist agenda. And there were fears that the immigration issue might get even stickier.
But instead of the man who will say and/or tweet just about anything just to get attention, America was treated to a Trump that looked and sounded downright "Presidential." A Trump that was upbeat and hopeful. And a Trump that hadn't forgotten about the idea of spending a trillion or so on economic stimulus.
In short, the President acted like the new leader of the free world instead of the say-anything, headline-grabbing, realty TV star that showed up so often during the campaign.
Some folks called the speech Reagan-esque. Some applauded the unifying tone. And one commentator said that this was the Trump that people hoped for in the White House.
In other words, Trump delivered and the bottom line on the subject is Wall Street liked what they heard.
Reason #2 - The Fed
As someone who has followed the Fed for more than 35 years, I can certainly understand why the recent Fedhead commentary might be confusing. You see, normally if Fed officials had spent a lot of time talking up a rate hike that was to occur BEFORE the market was expecting said hike to take place, stocks would tank. Remember, the stock market does NOT like surprises - especially from the Federal Reserve.
So, comments from the Fed's Kaplan, Williams, and Dudley, which all supported the idea of hiking rates in March, might have been reason for concern. However, it is important to recognize that this time around, raising rates a couple months early is being viewed as a good thing.
The thinking is fairly straightforward. Apparently the Fed is feeling more confident about the economy. And given the fact that this merry band of central bankers is oftentimes accused of being behind the curve, well, the newfound confidence in the economy goes hand in hand with higher stock prices.
Reason #3 - A Little Something Called PCE
As readers are undoubtedly aware, the world's global central bankers have been trying desperately to create some inflation in their respective countries since the credit crisis ended in 2009. The overriding goal has been to avoid a Japanese-style deflationary spiral, which, once started can be very difficult to stop.
So, the fact that the Fed's preferred inflation metric - the Personal Consumption Expenditure (PCE) Index - shot up 0.4% in January (the most since April 2011) and came in at +1.9% on a year-over-year basis (the most since October 2012) was viewed as a "win."
Granted, the 1.9% reading was below the Fed's target of 2.0%. But the key is the trend is going in the right direction and it looks like Bernanke/Yellen's objective will soon become a reality.
Reason #4 - "It's the Economy, Stupid..."
While everybody knows that the economic data in the U.S. has been BTE (better than expected) of late, what really got traders excited yesterday was the PMI readings out of Europe. Remember, we now live in a global world. So, with the U.S. economy doing just fine, thank you, China's economy appearing to be alive and well, and Europe's economy showing some signs of life, the words you are looking for are, "buy 'em!"
Reason #5 - FOMO
With stock indices having enjoyed gains that would normally represent a very good calendar year return in the three-plus months since the election, there can be no arguing the fact that the bulls are on a roll. And what happens when the bull train starts to steam away from the station without you, you ask? People scramble to get onboard, that's what.
Often referred to as the Fear Of Missing Out (FOMO), emotion tends to get the best of people in this type of environment. And while analysts will go to great lengths to justify why stocks are doing what they are doing (i.e. discounting better days ahead), the bottom line is that after a couple of years of sloppy, sideways action in the stock market, investors don't want to get left behind here.
Thought For The Day:
Laughter is great exercise - it's like jogging for the soul!
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Trump Administration Policies
2. The State of the U.S. Economy
3. The State of U.S. and Global Central Bank Policies
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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