The Dow Jones Industrial Average recently completed its eleventh consecutive record close, a sign that the Donald Trump rally was still going strong. But a closer look at the numbers suggests the surge may be on its last leg.
Stocks are up more than 10% since Trump won the presidential nomination on November 8. By the new year, the uptrend was losing momentum, leading some analysts to conclude that a major correction was on the way. After a period of lateral moves, stocks resumed their uptrend on February 9 after Trump promised to unveil “phenomenal” tax cuts in the coming weeks. That promise sent Wall Street to new highs, which could serve as a clear sign that investors were drawing inspiration from the White House.
However, the so-called Trump reflation trade, which tracks expectations of rising inflation and higher interest rates, is beginning to sputter. This suggests that bond investors expect inflation, interest rates and economic growth may not rise as boldly under Trump as previously expected. In the absence of those expectations, stocks may be poised for a short-term correction.
Of course, investors shouldn’t underestimate Trump’s ability to talk up (or down) the financial markets. The President has already shown an uncanny ability to influence investor sentiment through off-the-cuff remarks during press conferences. This may continue for the foreseeable future.
However, at some point, the Grand Old Party (GOP) administration must demonstrate that it will live up to its lofty campaign promises. Although Trump has signed a myriad of executive orders directed at reforming trade, immigration and financial regulation, actually creating meaningful policy changes will probably be easier said than done.
Treasury Secretary Steven Mnuchin recently told the FOX Business Network that investors shouldn’t expect Trump’s policies to have much of an impact on the economy this year. The secretary’s comments indicate that the new administration will require more time to navigate bureaucratic and regulatory hurdles. At the same time, Mnuchin has laid out an aggressive timeline for achieving tax reform – one of Trump’s central campaign promises.
“Tax reform is our number one objective. We think it’s absolutely critical to getting to economic growth,” Mnuchin said. “There’s trillions of dollars offshore that will one back and this will create jobs.”
Analysts at Goldman Sachs say Trump’s one-off tax holiday would encourage S&P 500 companies to repatriate around 20% to the $1 trillion in cash they currently hold outside the country. However, analysts are less convinced this money will be used to boost investment and job creation.
The Trump rally has added around $1.5 trillion in value to Wall Street. While stocks continue to hover around all-time highs, further gains are probably not expected without a politically-inspired catalyst. This could make stocks vulnerable to a pullback in the event the GOP struggles to meet its objectives.
 Investopedia (February 10, 2017). “A Key Trump-Rally Indicator Starts to Crack.”
 Julia Limitone (February 23, 2017). “Treasury Secretary Mnuchin: There Will Be Limited Impact from Policies in 2017.” FOX Business Network.
 Julia Limitone (February 23, 2017). “Treasury Secretary Mnuchin Lays Out ‘Aggressive Timeline’ for Tax Reform.” FOX Business Network.
 Sam Bourgi (February 26, 2017). “Trumponomics: Trump’s Economic Plan Boosts Business Confidence.” Economic Calendar.