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Will the Trump Rally extend beyond inauguration?

As the world continues to watch US President-Elect Donald Trump prepare for his January 20th inauguration, key financial markets have already made their views on Trump exceptionally clear. Strong bullish trends in equities and the US dollar have continued virtually unabated since the November election, while gold prices have found little reason to rally much in the midst of a precipitous plunge.

Donald Trump's actual performance as President after he formally takes office in less than two weeks is still very far from known, but his most heavily-promoted policy objectives have thus far given markets much to feel optimistic about. Most notably, Trump's pro-business stances relating to increased fiscal spending, lowered corporate taxes, financial deregulation, and aggressive job creation have helped provide a dramatic boost to both equity markets and the US dollar in the past two months.

Furthermore, as bond yields have correspondingly risen, the US Federal Reserve has become increasingly hawkish in anticipation of greater fiscal spending and inflation under the incoming Trump Administration. This Fed hawkishness has been reinforced by consistently strong employment data that has essentially placed the US at or very near full employment. As a result, the Fed's newly-accelerated outlook for monetary tightening stands in stark contrast to the much more dovish stances of other major central banks. This divergence between the Fed and others has helped prompt the rally for the dollar against its major currency rivals, while dollar-denominated gold has plummeted.

With the Fed focused as usual on its dual mandate of maximizing employment and stabilizing prices (inflation), solid US jobs reports in recent months along with a potentially inflation-boosting Trump Administration have essentially given the Fed a green light to tighten policy significantly further. Signs of rising inflation have also been apparent with energy prices having climbed sharply and US wage growth surprising to the upside in last week's jobs report. A resulting rise in interest rates is clearly a major bullish driver for the dollar and substantially bearish for gold.

The question still remains, however, as to whether Trump's actual performance after inauguration will come even close to matching the pre-inauguration rhetoric that has built up such euphoria with equity and dollar investors. While some policy promises will likely take a significant period of time to come to fruition, if at all, others may be assessed shortly after inauguration. As always, the new President and his administration will likely be under the greatest scrutiny during the first 100 days or so in office. It is during this time period that financial markets will likely face their most important tests as the new administration struggles with inevitable challenges.

Aside from the key uncertainties over President Trump's follow-through after inauguration on extremely high expectations, other near-term risks for markets also loom on the near horizon. Fourth-quarter earnings are set to begin, with the surging financial sector leading the way. Earnings expectations are inordinately high, which could potentially lead to disappointment that drags on the broad stock indexes. In addition, the strength of the US dollar, if sustained, should also pose a significant threat to businesses and US equity markets going forward.

Overall, however, the primary challenge to a continuation of the Trump-driven rally for both stocks and the dollar lies in the overheated optimism that has been in place since November's presidential election. In this type of environment, momentum alone could certainly carry the markets even higher from current all-time highs. However, any inevitable disappointments that emerge in the coming weeks and months after inauguration are also likely to be magnified, which could quickly inject heightened volatility into the markets.

In the run-up to Inauguration Day on January 20, Wednesday brings the first formal press conference by Donald Trump since November's election. Traders and investors will be watching very closely for any clues as to whether his pro-growth promises are likely to be realized. This press conference will therefore begin a period during which markets will be largely driven by assessments of Trump's ability to fulfill his promised agenda.

More From James Chen, CMT