Don't you just love this game? One minute the stock market is rallying to new heights on the back of Trump's big plans (and the related odds of said plans being implemented). The next thing you know, "repeal and replace" is dead on arrival, tax reform is looking less and less likely in 2017 (if at all), and nobody's talking anymore about that stimulus plan to make America great again.
Add in the Russian scandal (which seems unlikely to go away any time soon), the President's insistence on tweeting things that shouldn't be tweeted, the fiasco with Comey's firing, and the never-ending "high level White House shake ups," and well, it is increasingly difficult to be optimistic about the administration's ability to get anything done - let alone everything that was on the pro-growth agenda.
Now mix in more terror attacks in London and some fresh "hard" economic data that was much weaker than expected, and one can't be blamed for thinking that the bulls might be in trouble. You remember all those traders that told us, in no uncertain terms, that the economy had nowhere to but up and that stocks were sure to follow, right?
So, I ask you... How are you feeling about that "reflation" argument (aka the "Trump Trade") right about now?
The point is that the initial premise for stocks rallying post-election is clearly sagging. As a result, stocks closed last week at fresh all-time highs. Wait, what?
That's right, despite all the administration's misfires, false starts, and political blundering, the stock market appears to be none the worse for wear. For example, as of the May 31st, the S&P 500 sported a gain of 8.66% for 2017 - and the year isn't even half over yet.
So what gives? Does the market not see the political risks of what some are calling a modern-day Watergate? Didn't traders "get" that the Jobs report was surprisingly weak? Isn't the Fed about to hike rates again? Has anybody noticed that the market's gains are being driven by a handful of tech stocks? Isn't this the second longest bull market without a 20% decline in history? Aren't valuations at levels only seen prior to massive bear market declines? And, in short, shouldn't the market be more worried?
Don't look now fans, but it looks like the market's focus has shifted. Yep, while you were focusing on Junior's graduation, finalizing those summer vacation plans, and perfecting your Memorial Day cookout menu, things changed. Gone is the obsession over every tweet out of 1600 Pennsylvania Avenue and the gaming of exactly when that massive tax reform bill will hit.
In its place is a bunch of stuff that is a lot less exciting. Like earnings exceeding expectations. Like economic growth perking up around the globe. Like interest rates pulling back. And like Central Bankers deciding it's time to walk away.
Lest we forget, the U.S. economic expansion is entering its ninth year. Both rates and inflation remain low by historic standards. And that plow-horse economic growth rate (hat tip to First Trust's Brian Wesbury) in the U.S. is expected to continue.
Corporate earnings and profits are improving. JPMorgan reports that S&P 500 earnings were up almost 14% in the first quarter. And Bob Doll's gang expects earnings to peak at close to 20% growth later this year before moderating in 2018.
In short, THIS is what the market looks to be focused on at this time. And THIS is why the bulls have refused to yield.
Sure, stocks could dive at any time and for just about any reason. Stocks are overbought, valuations are stretched, and my models are not as happy as they should be given the market's recent ascent to all-time highs. As such, a correction is to be expected at some point.
However, from a big-picture, macro perspective, as long as the economy and earnings continue to improve, stocks still have a pretty good fundamental footing. And as long as decent fundamentals remain in place, the secular bull can continue.
Thought For The Day:
"There's a force in the universe that makes things happen; all you have to do is get in touch with it. Stop thinking...let things happen...and be...the ball." Ty Webb (Caddyshack)
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 the U.S. Economy
2. The State of Earning Growth
3. The State of Trump Administration 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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