Bulls rally on Trump enthusiasm as traders rush to buy small-cap stocks, banks and Tesla | Wilnesh News
Last week, profound changes occurred on the electoral map, even upending Washington, D.C. But how much have economic and investment conditions really changed? In the last-minute anticipation of Donald Trump’s victory on Tuesday and the immediate reaction that followed, nearly everything was moving in favor of risk markets. The swift and decisive election results immediately released pent-up tensions over a potentially unresolved outcome. The clear possibility of a Republican sweep in Congress then sparked a 2016 Trump trade strategy of buying cyclicals, small-caps and financials. After briefly topping the 6,000 mark on Friday, the S&P 500 ended the week up 4.7%, an almost perfect outcome for the market’s three-week internal price-in of the fall rally, giving average stock prices a chance to pull back even as S&P The S&P 500 remains slightly below its all-time high. Almost as an afterthought, the Fed cut short-term interest rates by a quarter of a percentage point, and Chairman Powell did nothing to downplay the possibility of further rate cuts within six weeks. This comes amid a surprising economic uptick and a long-term pullback in inflation data that has paused at levels just above the Fed’s 2% target. Even though it looked like a reflection of tightening financial conditions, it lacked impact. The 10-year Treasury yield briefly rose above 4.4% on Wednesday, but even that was below spring highs and current levels haven’t shown to be much of a hindrance to the economy. The same goes for the U.S. dollar index, which, while rising, remains below its mid-year highs. That’s about as bullish fodder as investors dare ask for, and more than most bears would choose to fight, at least for now. But, as always, there are some nuances and potential complexities to consider. Trump returns in 2016? First, the market is already in a strong uptrend, with the S&P leading by 20% by October 2024. Cyclical stocks have been outperforming defensive stocks, with financials outperforming technology stocks since August. Once the Fed pivoted decisively to cutting rates, even the small-cap Russell 2000 made up more than half of its year-to-date deficit against the Nasdaq 100 between mid-July and mid-October. .SPX .RUT YTD mountain S&P 500 vs. Russell 2000, Doug Ramsey, chief investment officer of YTD Leuthold Group, cited some key differences between November 2016 and the current moment: “When 2016 won, core inflation was just At 2% today, there are few concerns about the inflationary impact of the tariffs, which now exceed 6% of GDP. “While investor sentiment was subdued ahead of the 2016 vote, a component of our sentiment composite index,” he added. One component (consumers’ expectations that stock prices will rise over the next 12 months) surged to an all-time high a month ago. ” Before the 2016 election, the S&P 500 was trading at the same level as 18 months earlier, trading at 17 times earnings, while margins fell after the 2015-16 earnings recession. Now, the S&P is up over the past 18 months By 44%, with a price-to-earnings ratio of over 22 and higher profit margins, the U.S. economy had been struggling with sluggish growth and failing to hit its 2% inflation target for more than five years until the 2016 election. Today, we are emerging from an inflationary shock, with real GDP running above trend for the past three years, and investment grade corporate credit spreads then being double what they are now, leaving little room for financial conditions to improve. In other words, under Trump. After the surprise victory in 2016, when people started to see Trump 1.0’s reflationary policy mix of tax cuts and deregulation, reflation was exactly what the economy needed. Now, expansionary policies (putting aside possible tough tariffs for now) ( Takes over the S&P 500. S&P 500 Value vs. Growth Citi equity strategist Scott Chronert, who regularly calculates the five-year profit growth rate for stocks at a given valuation, said on Friday that as election week unfolds. “Our implied growth forecast rose to 13.6% (annual) from 12.4%”. Chronert calculates that this measure “fully prices in tax cuts for domestic producers at 15%, which according to our calculations is equivalent to an annualized free cash flow impact of +0.6%. The remaining +0.6% is for deregulation and household Tax cuts. He called on investors to play down any near-term rebound that would lift the S&P above its year-end “bull market” target of 6,100. The assessment of Tesla’s 30% gain in a week is both fair and sane. Yet even if the underlying return set-up derived from the math isn’t exciting, bull markets rely on stories and feelings and the money flows they encourage. If reflation policy prescriptions are not needed today to heal a damaged economy, perhaps it will be used by markets for entertainment purposes? Of course, this may have been foreshadowed by the way favorite Tesla surged about 30% this week, the surge in heavily shorted stocks, and the way shares of companies like Goldman Sachs surged vertically in anticipation of the merger and IPO frenzy . TSLA 5D Mountain Tesla, 5 Days More specifically, just hope that possible corporate tax cuts and the industry’s power to make regulations more favorable to them will maintain the feeling that earnings growth can improve by the end of next year, And could extend the economic cycle that not long ago seemed to be losing steam. To be sure, by some measures the S&P 500 is running a bit hot, having broken out of the top of its two-year bull path. This also means that a pullback should not be surprising, but an eventual peak is unlikely. For such a strong index rally, market breadth throughout the week has also been rather lackluster, which shows how confident the market is in picking out perceived policy winners from the rest of the group. Investors have already cut their exposure and hedged quite aggressively ahead of the election, so there may still be room for Wall Street to further “rebalance portfolio risk.” Still, after a plethora of market-friendly news, now is the time to watch whether investor sentiment and positioning are heading towards a volatile bullish extreme – even as we approach the end of the year, such data isn’t always positive for seasonal upside Prejudice creates too many obstacles.
