Trump Rally Still Alive and Kicking, For Now

After a prolonged period of sideways trading within a tight range just off recent record highs, the Trump-fueled rally in US equities once again took center stage in the first few days of the week and the new Trump Administration. Both the S&P 500 and Nasdaq indexes reached new all-time highs on Tuesday amid a series of executive orders issued by the new US President as he hit the ground running immediately after inauguration. The Dow also surged on Tuesday, by over 100 points, to re-approach the highly anticipated 20,000 mark once again.

These sharp market moves were supported by better-than-expected earnings reports coming from several major index-component companies. Indeed, a majority of S&P 500 companies have beaten consensus forecasts during the current earnings season thus far.

What really drove the renewed stock rally, however, were the seemingly frenzied actions taken by the new Trump Administration to begin making good on campaign promises. Of course, these actions mostly consisted of "low-hanging fruit" in the form of executive orders that could be accomplished quickly without the need to navigate the maze of Washington's legislative bureaucracy.

These executive orders included:
  • A hiring freeze imposed on federal government agencies.
  • US withdrawal from the Trans-Pacific Partnership (TPP).
  • An order to "waive, defer, grant exemptions from, or delay the implementation of any provision or requirement” of ObamaCare - which is essentially considered the beginning of the end for the Affordable Care Act.
  • A ban on federal funds to organizations that perform or promote abortions.
  • A revival of construction on key oil pipelines that had been stalled by the previous Obama administration. 
Trump is also expected in the next few days to sign an order to renegotiate or withdraw from the North American Free Trade Agreement (NAFTA) with Canada and Mexico.

In addition to these formal orders, Trump also held several meetings with key business leaders in his first two working days in office. During those meetings, Trump detailed his promises to cut corporate taxes down to "15-20%" from 35%, and slash regulations by 75% or "maybe more."

Along with this flurry of executive activity and reiterated assurances, several more of Trump's Cabinet nominees were confirmed. Additionally, he has stated that he would nominate a new Supreme Court justice by next week.

If markets had been bracing for disappointments or divergences from Trump's campaign promises, they have not seen any as of yet. Market optimism continues to run exceptionally high on the increasing anticipation that Trump and his team may indeed deliver on promises made. For equity markets, this delivery is especially crucial with regard to tax reform, deregulation, and fiscal spending. Though he has only been in office for less than a week, Trump's actions thus far have given markets much confidence that his administration appears to be moving in a direction that should stimulate economic growth and boost capital markets.

From a conflicting perspective, however, equities have been, and continue to be, well overdue for a pullback or correction. Valuations were generally already high and continue to climb on not much more than optimistic expectations. As a reminder, it was the same Donald Trump who stated during his campaign last year that the stock market is in a "big, fat, ugly bubble" that is "going to come crashing down" if interest rates rise. Well, it looks increasingly likely that interest rates will indeed continue to rise this year.

In the arena of international trade, lingering concerns that Trump's highly protectionist stance would be harmful to US businesses have seemed to dissipate for the time being. Instead, the markets are focused now on any steps taken towards tax/regulation cuts along with increased spending. But unlike the very swift and uncomplicated process of signing executive orders, these changes will necessarily take much longer to realize, as they must navigate through Congress. And although a Republican majority in both chambers of Congress will indeed make some reforms and initiatives easier, there are still conflicts between Trump's stated agenda and many of the positions of congressional Republicans.

Trump can very easily continue to make assurances about his intentions with regard to taxes, regulations, and spending, but the true challenge will lie in the actual delivery of these changes. Furthermore, even if all of these plans are eventually delivered in one form or another, they will probably look significantly different from the bold promises originally outlined by Trump, due to compromises that will almost certainly need to be made.

In the meantime, the Trump Rally could indeed continue to extend even further into the near future on persistent optimism alone. But the current reality is that the Trump Administration is not yet even a week old. The stock rally has been extended based primarily on executive orders and more assurances by the President and his team. A much truer test of the rally will most likely occur when the new administration turns its attention to the most critical market-sensitive issues outlined above. At the current time, markets have been and continue to be pricing-in very high expectations for Trump's follow-through on these issues. With such high expectations, any significant disappointments going forward will likely have a magnified adverse effect on the renewed Trump Rally.

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