Jim O’Sullivan being surprised by some economic event is in itself a big event. He is no ordinary man. For someone who has won competitions for forecasting economic events, to be surprised by turn of events not once but twice in a matter of two months appears to be unusual. In November, Jim was surprised by the election of Donald Trump. His second surprise was the manner in which markets responded to this event. Prices of stocks surged initially, and later, instead of tapering off, they continued to move up after a brief period of lull.
This surge in prices has taken for a time period that is long enough to be referred to as a rally. Jim says it ought to be called Trump rally in honor of the man who triggered it with his election as POTUS. In a little over 3 months, Trump rally has increased indices of stocks by nearly 10%. Dow Jones has gone past 20000 and S&P has grown in size by nearly $2 trillion.
It all started with a surge in prices of banking stocks but later spread to diverse industries. The reasons behind Trump rally are positive economic indicators and certain optimism about change in taxation and regulation policies under the new regime. There is a new found confidence among the people in the new Republican government, especially in the business community.
One needs to be cautious
The data concerning Dow and S&P is real but Jim cautions against his own growth predictions for the year. He says that there might be a correction as Donald Trump might not be able to deliver on his promises in the area of tax cuts and international trade. It may also be the other way round. Trump may deliver on his tax cut promises but these changes might not initiate the kind of growth that is expected by the market. There are also fears that any stimulus triggered by tax cuts announced by Trump might get off set rise in interest rates introduced by Federal Reserve. Then there is always the risk of trade war with other countries like Mexico and China because of the threats issued by Trump himself to annul treaties and levy tariffs.
Trump is using figures to brag about his administration
Jim says that Wall Street is perhaps ignoring all these signals and the only casualties are going to be investors. He feels that hopes have risen pretty high but fears that the bubble is going to burst sooner or later. Even Trump has started to boast about the progress that his administration has made in just 4 weeks, citing the upswing in the stock markets. He talks about optimism in the business community everywhere he goes and never forgets to mention stock market high to support his claims. Even some of the Democrats have started to credit Trump for the rise in stock markets.
Talking about Dow, the story of Goldman Sachs is indeed incredible. The stocks of this investment bank have risen by 40% since November 8. Goldman Sachs happens to be the alma mater of many of Trump advisors like Steve Bannon, Gary Cohn, and Steven Mnuchin. There is a general feeling among the investors that Trump will make their lives easier. Many Wall Street firms came under heavy regulation with the introduction of the infamous bill called Dodd Frank in 2008 in Obama administration. These firms are today expecting higher profits for them with deregulation they believe would be ushered under Trump administration.
The gains in the stock market are spread across many industries though they kicked off with a surge in financial stocks. But even today, the prices of financial stocks are up by 6% while non financial stocks are up by only 3%.
Investors have turned a blind eye to logic and reasoning, and they are not ready to look at the reasons why Trump might not deliver on his poll promises. This is precisely why Trump rally is continuing. However, it may not last long. But even when it bursts, it is not going to harm the growth of economy as it is expected to grow by 2.7% this year. This is a much better growth than attained in any of the 8 years during which Obama was President.
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