The Market’s Future Under Trump’s Presidency

The Market's Future Under Trump's Presidency

“America First,” said then Republican presidential nominee Donald Trump last year, as he promised his voters a prosperous new era of hundreds of thousands of new jobs and a flourishing economy, should they chose him to be the 45th President of the United States of America. And indeed, since his surprise victory in November, the job increase has exceeded forecasters’ expectations with 227,000 added jobs versus the predicted 180,000—stocks have also been on an incredible and seemingly unstoppable upswing, with the S&P 500 rallying nearly 10%. But looking more long-term, what is the market’s future under Trump’s presidency?

The S&P 500, Dow Jones industrial average, and the Nasdaq all hit all-time highs for five straight days, making for the longest such streak in 25 years. The Dow and Nasdaq are up 13 percent since Trump’s win, and the S&P is up 10 percent. Stocks have not witnessed a 1% decrease since October 11, which is the longest streak since 2006. Consumer confidence is the highest since over a decade as retail sales picked up a 0.4% gain in January, which in turn exceeded the expected 0.1% gain.

What Does the Future Hold?

The S&P trades at about 27 times earnings, well above its long-term average of around 16, and at its highest level since June 2004. The S&P is 9 percent higher than its 200-day average, however, this is often a signal that a correction is ahead. The view on Wall Street is that Trump will deliver tax cuts and unshackle corporate America from regulation, but running a country is different from running a private business and changes may not take effect that quickly. Investors may already now treat stock prices like a cut in the corporate tax rate to 20 percent or lower within the year, together with a growth to 3 percent or better by next year, while it’s not guaranteed to happen that quickly.

In fact, global investors are are questioning if the rally is exhausting itself, as they already see markets as overpriced. Some are cautious since the president is know to be unpredictable, which in turn may favor investments in bonds or stocks from other countries over the U.S. stock market. Concerns have grown enough to cause the committee steering T. Rowe Price’s target-date retirement funds and other balanced funds to view stocks as less attractive investments than bonds.

This shift is significant because it’s the first time this has happened since 2000, when the dot-com bubble popped. In all fairness, the trend has been moving in that direction for years, since stock prices have risen faster than corporate earnings, which in turn makes them look more expensive. Still, it was only very recently that the committee decided to favor bonds instead of stocks. Then today, February 24th, today, U.S. indexes were falling modestly, ending Dow Jones industrial average’s 10-day winning streak.

Strategy Shifts Looming

Some strategists are also worried about the result of Trump’s constrictions in international trade. He not only killed the President Obama-backed Trans-Pacific Partnership, but also had tough words with Mexico, Japan, China, and Germany about their exports. If U.S. loses its place in international trade, someone else will fill it. China, for example, may end up replacing the U.S. as a big trading partner for other nations. This will hurt the U.S. economy immensely in the long run.

A 20 percent tax on imports will likely hurt trade in the long run, even ff it doesn’t apply to exports. If the dollar adjusts by rising sharply, it will head off any inflation from a new tax on goods. But if the dollar doesn’t adjust, the new costs will end up hitting consumers.

Conservative media outlets, however, have pointed out how Trump managed to reduce the US national debt by a staggering 12 billion dollars during his first month in office. On February 21st, just a month after Trump taking office, the US debt load stood at $19,935 billion instead of of $19,947 billion. It’s the first time in decades the debt clock is turned backwards.

Time will tell how the market will turn out during the next four, possible eight years, of a Trump presidency. Right now the stock market is seeing an incredible upswing, and new jobs are being created just as promised. However, we might be in a stock market bubble right now, which will burst soon. There are also concerns of how taxes on international trade will affect the economy long term. Stay tuned!

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