The major US equity indices had a bullish reaction to the election of Donald Trump as the 47th President of the United States when they broke away from a period of sideways consolidation driven by uncertainty prior to the elections.
The move was broad-based with bullish appetite ranging from large tech stocks in the Nasdaq to the smaller cap stocks in the Russell 2000. Economic and corporate fundamentals remain at the forefront of investor concerns and the prospects of further growth stimulus under the Trump administration had been well received by investors. The fact that the Federal Reserve lowered rates once again last week – as expected – also helped cement the positive sentiment for traders.
But the Trump effect has only gone so far. A lot of the exuberance in markets prior to the election was driven by the possibility of a Trump victory. Now that the event is over, we’ve seen the confirmation of his presidency drive the Trump effect further, but it has started to falter. This is not uncommon.
Now that the post-election euphoria has died down, there is a sense of what is next. Trump’s term in office will not start until early next year, so markets are in this limbo of knowing what could happen given his election promises but having no official confirmation of what will happen.
Now we’re back to focusing on what is currently happening, and the focus remains on the economy and the Federal Reserve. Wednesday’s CPI data confirms that inflation has stopped falling. Core inflation above 3% is still too high, and wages remain the key problem. The Fed is still likely to cut rates in December – it has plenty of wiggle room to do so – but terminal rates are now expected to be higher. This limits the upside potential in stocks, especially smaller caps, which are more sensitive to financial conditions.
The reaction these past few days hasn’t yet materialised into a pullback, especially for the S&P 500 and the Nasdaq, which suggests that, despite the lack of clarity in further bullish follow-through, there isn’t a real desire to be a seller right now. The path of least resistance could remain higher. Traders just need a little more convincing that the economy won’t worsen and threaten their corporate returns.
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