I’ve been travelling in the rural Northwest the past week and have had only intermittent internet access …until now.
Stepping back from the day-to-day, has its advantages, though. Having little up-to-the-minute data, I’ve been forced to look at the longer-range stock market picture.
The first two or three months after the election, the dollar and stocks both rose as investors celebrated the presidential results. The strongest groups were Energy, Materials and Industrials–the ones that would benefit both from an acceleration in economic growth and implementation of the professed Trump agenda of tax reform and infrastructure spending.
This period ended rght around the inaguration. It was replaced by a market that embraced secular growth areas of Technology and Healthcare. The dollar began to drift downward, as well. This sector/currency shift was partly, I think, a rotation from leaders to laggards that happens in every market that’s not going sideways. Part was also concern that delivering on the Trump agenda might not be as easy as investors had supposed over the previous months.
During 2Q17, the stock market began to understand how deep the problems are that the Republican party and the adminstration are having in getting anything done. The main direct consequence of this loss of confidence has been a sharp fall in the dollar, I think, on the idea that failure of the administration and congress to engineer fisal stimulus would translate into a slower pace of interest rate increases by the Fed. A weaker dollar benefits multinationals, so IT continued to be a winner, along with many members of the Staples group, which also has large foreign exposure.
This last movement has also played itself out in recent weeks, I think. The market as a whole, and major tech stocks in particular, have begun to move sideways, expressing Wall Street’s belief (mine, too) that they’ve gone up enough for now. As I see it, action has been based chiefly on relative valuation– rotations deeper into IT via smaller stocks and back into the Trump stock winners of late 2016.
The kind of movement described in the last paragrah doesn’t typically last long. At some point, the market will return to the question of whether structural reform in Washington is possible. As I see it, the underlying notion investors now have is that important change can and will happen, although people may have substantially different pictures of how this will occur.
It seems to me that as long as investors hold this belief, the US stock market will move sideways to up, driven by earnings gains.