U.S. stocks have been enjoying an interesting bullish ride known as the "Trump bump" over the last couple of months after Donald Trump snagged a surprising victory in the 2016 presidential election. It is well known that Wall Street largely expected Trump's victory to trigger an unprecedented level of volatility and uncertainty that could lead to a stock market crash. The surprising fact, however, is that stocks have found reasons to soar on the wings of President Trump's proposed economic policies.
There is no shortage of news reports about how U.S. stocks rallied on to record highs in the months after Trump's victory. The Dow Jones Industrial Averge has crossed the elusive 20,000 milestone. The chart below shows how stocks have soared and how market volatility as seen in the VIX is at record lows since Trump won the election on Nov. 8, 2016.
From the chart below, you will notice the S&P 500 Index has gained 10.48%, the Nasdaq Composite has gained 12.36% and the Dow Jones is up an impressive 13.51%. Interestingly, the CBOE S&P 500 Volatility Index, which serves as a gauge of volatility in the market, is down an incredible 36.9%, suggesting traders and investors are not worried about market volatility in the short term.
It is fascinating to know Steve Mnuchin, the new U.S. Treasury Secretary, thinks the rally in the market is Wall Street's way of passing a vote of confidence in Trump's plan for fiscal stimulus and tax reforms. In a recent interview with CNBC, Mnuchin noted the administration views the stock market as an economic report card and that "there's a lot of confidence in the Trump administration and in the desire to invest in the U.S."
Mnuchin also believes the market is a reliable indicator of economic growth. He said, "We're in an environment where there's very attractive investment opportunities in the U.S., and I think that's reflective of the administration's goals and what the market thinks of it."
The Trump rally is not slowing down, yet
U.S. equities have been soaring over the last couple of months because investors believe some of Trump's economic policies will be beneficial to the market. For instance, Trump has promised to reduce taxes, but it seems corporations will enjoy the biggest cuts. Trump has also promised to roll back, reduce or repeal some of the regulations that "stifle" growth for American businesses. His "America first" foreign policy also seek to provide U.S. companies with an edge in the global market.
The recent slowdown in the rally, however, is helping market bears find their voice. They believe the current market rally is a fluke that will soon be corrected. Jane Fu, a sales trader at CMC Markets, notes that “a weeklong Trump rally has possibly to come to an end." Mike Baele, managing director of U.S. Bank’s Private Client Reserve, notes that a correction is to be expected because “the market might have just gotten a bit ahead of itself.”
Market bulls, however, are not worried about the slowdown in the rally and strongly believe it is normal for the market to experience some pauses after it has had a running streak of setting new records. Traders applying the trendline strategy will be quick to note the predominant trend in the market is still northbound because technical and fundamental indicators are still supporting the rally. The rally will continue until investors become fearful enough to induce a profit-taking selloff.
Of course, the market will need to retreat 5% from current highs because bears can gloat over a market pullback. More so, the market will need to suffer a 10% decline before bears can start making noise about a market correction. Hence, just because indexes retreated 0.1% does not necessarily mean stocks are ready to tumble from previous highs.
Disclosure: I have no position in any asset mentioned in this article.
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