When President Donald Trump was elected, he talked about how great and successful his presidency would be, because he’s a really smart man, a very smart man, one of the smartest men in US history. Of course the press laughed, then verbally abused him, and then people stopped and started asking questions. How is he so lucky? How can he understand tax cuts? Why do so many corporations like him? And why are late-night TV hosts, in what seems to be total frustration, hoping for a recession?
His tax cuts are supporting the US equity market with a lot of help from corporate earnings, which have been shockingly strong in the past two quarters over 2017. Still, some investors are concerned that equity markets are overdone in this rally and is due for a pullback, while fears driven by a possible trade war remains on front page new – people truly are worried.
The current equity rally defies gravity and all natural rules, it continues with total disregard for recent tariffs and trade disputes, and from a technical level, it gives nothing back, while it looks overdone. We called – I take full responsibility – for the S&P 500 and the Dow to pull back in June or July, but the market only rallied higher throughout both months. This really is immune to any trade tensions between the China and the US, the two largest economies in the world. The rally continues higher even when investors have lacked confidence – some for months and even years. Think about it, how many market gurus have sat at a desk calling for a massive pullback since 2017?
One more day of higher equity indices, and this current rally will go down as the longest rally since the end of WWII in 1945.
Corporate earnings have had almost 25 precent gains in two consecutive quarters, compared to 2017. Another factor to discuss is that the Fed raised rates 7 times since 2015 with another two scheduled this by the end of 2018. Of course the President is making it clear that he does not want these hikes. But again, markets are being driven by easy money for 10 years, and massive fiscal stimulus. This is the fear, easy money and fiscal stimulus – both cannot be sustained.