Since Donald Trump won the presidential election in November, most analysts have focused on how his expected policy changes will affect the U.S. stock market in the long run. Stocks for companies in sectors that are believed to be favored by Trump's policies have been projected to be the biggest winners.
On the other hand, those that are seen to be in sectors that Trump’s policies will affect negatively are deemed to be losers. Analysts of a contrary opinion predict that Trump and his policies are not the major threats to the stock market; rather, the real threat is in the economy itself.
The uncertainty created by the Trump presidency has proved to be a major factor that investors are focusing on when reallocating their portfolios. Some analysts are predicting a sharp decline in U.S. stocks soon, hence the volatility witnessed in the last few months. Legendary value investor Warren Buffett (Trades, Portfolio) seems to differ. During an interview in February this year, he said that despite the current rally in U.S. stocks the market is pretty much undervalued. "We are not in bubble territory or anything of the sort," the billionaire told CNBC.
Under these circumstances, some investors will seek short-term trading opportunities including US exchange traded binaries, EU binary options, currencies, and stock options, among others. Traders will seek to capitalize on opportunities provided by alternative markets to gain from the price fluctuations before calmness is restored in the mainstream markets.
Bob Doll, a Chicago-based chief equity strategist and senior portfolio manager at Nuveen Asset Management LLC, thinks that investors should not be deluded by the short-term political processes within the U.S. and forget the major economic factors that might bring the stock market crumbling down. According to Doll, equities and high-yield bonds may suffer in the short term with a probability of a deeper sell-off in the medium term. He, however, remains optimistic that in the long term, the stock market will be bullish.
In a letter to clients on April 3, Doll noted that “We remain constructive in the medium and long term toward risk assets but are growing increasingly cautious about the short-term outlook.” He further added that “More than politics, the economy probably presents a more probable roadblock for equities.” His short-term decline sentiments could be proven wrong, going by the eight-year bullish trend in the stock market that has defied similar pessimistic projections in the past.
Focusing beyond politics
Swayed by the promise of an economic recovery based on the growth of U.S. businesses under the Trump administration, the stock market has been upbeat since November 2016. For the past year, more than $3 trillion has been added to the value of stocks in the U.S. markets. Consumer sentiments are hitting the highest levels in more than 10 years, showing that there is renewed optimism within the economy.
Analysts warn that this hyper-positivity might be met with a setback that will sharply reverse the exponential upward trajectory. Economic factors such as a decline in manufacturing, the softening of oil prices or even weak economic data from China could trigger a downward spiral of the stock markets.
The worse-than-forecasted monthly auto sales report released on April 3 suggests that Americans are becoming thriftier and positive consumer sentiments might not be sustained for long. The rising gold price since January also indicates that investors could be reallocating their portfolios to safe havens based on the global geopolitical realignments, leaving fewer funds to invest in stocks. Based on these and other economic factors, analysts like Doll project that there will be a reversal in the upward market trends in the short term.
Doll is not totally ruling out the effects of the politics of the day. The lack of progress in budget agreement in Congress, as well as the major roadblocks being imposed on tax reforms, could find their effects trickling down to the stock markets.
Although a tax bill must be passed ultimately, the final tax bill will be very different and without the original tax reforms promised by the Trump administration, having been watered down in Congress. A watered-down tax bill with few tax reforms will be seen by the investors and business community as a failure by the Trump administration, igniting negative sentiments in the stock market and slowing down its growth.
Although Doll predicts a short-term market reversal, he notes that “We are not expecting a significant economic slowdown.” Essentially, the stock market is growing on good fundamentals, but investors need to be aware of other nonpolitical factors that could reverse the trend and cushion themselves against them.
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