I am starting to see more and more traders and strategists begin to question just how much politics really has had to with this tremendous run of strength the stock market has been on the last few months. After all, even the new administration has made it clear that it’s going to take some time for the economy to feel the effects of its policies, and most investors seem to understand, when it comes to the anticipated stimulus measures, there’s a very good chance SOMETHING is going to get delayed. Naturally, the positive expectations surrounding a more business-friendly Washington certainly help matters, but, remember, even before the election, we thought that overall economic conditions were good enough to spark improving earnings numbers and higher stock prices, so maybe this is all just an inevitable, reactionary breakout to what was a very difficult last couple of years. This time last February, of course, we were just emerging from what was really a stealth bear market, with the average Russell 3000 stock down about 35% from its previous high, and we are still coming off the 2014-2016 period where the market essentially went sideways, which has produced a fairly large technical base on which to build. The economic data since the election has largely supported an improving economy, as well, a point that now has Fed futures implying about a 50% chance we get a rate raise later this month. So, with an improving economy and an end to the earnings recession, perhaps just getting the election result behind us was the kick-start needed to propel stocks away from that wide technical base, and any of the expected stimulus measures from the new administration are just viewed as icing on the cake that can make things even better.
We should know a little more about that viewpoint after we see how the market and punditry react to President Trump’s address to a joint session of Congress last night, which was always going to be viewed as less of a state of the union and more a state of his administration’s highly-anticipated policies. There weren’t too many surprises regarding the programs Trump wants to implement, but the specific details and timeline are still scarce, adding to the argument that the market maybe isn’t as policy-focused as some (even we) have assumed. Overall, though, the President’s speech appears to have been received favorably, and, having watched the whole thing myself, it definitely was the most “presidential” he has sounded (and I’m sure there’s some tired Republican legs this morning from all that standing and sitting back down). It was a good speech that built on the things that won him the election while also clearly attempting to focus more on unity than division. It may not have completely swayed his detractors, but, let’s get real, this is still politics after all and someone is always going to be on the other side of any argument.
So, the question remains just how much of President Trump’s policies can the market really be pricing in considering we still know very little about them or how long they will take to be passed and implemented. It still seems likely to most that we’re not going to immediately get tax reform, an Obamacare repeal/replacement, regulation rollback, and infrastructure expansion all at once; this is the government after all, so things will have to be prioritized and negotiated. And as long as the market does truly understand this, it may mean there won’t be as much disappointment as expected if one or more of the policies gets delayed. Meanwhile, as long as the economy and earnings continue to improve, there’s a good chance this bull market can sustain itself as it awaits perhaps even more fuel for the fire. Interestingly, even as the stock market has done so well, analysts haven’t really raised their earnings estimates yet – 2017 and 2018 numbers have remained roughly the same – meaning there still may be plenty more upside when it comes to expectations.