Up until a week ago, U.S. stocks were rallying fairly steadily on growing sentiment that a Trump presidency and all-Republican Congress would boost growth and corporate earnings.
Their plans to cut corporate and personal income taxes, increase spending on infrastructure and reduce regulations were seen as accelerating growth, along with inflation, which pushed up bond yields. By Inauguration Day the stock market was up 8% since the election, though off its highs, and the 10-year Treasury note was yielding 2.46%, up 60 basis points.
Then President Donald Trump gave a brief inaugural speech, and financial markets listened for what the new president actually planned to do.
“We will follow two simple rules: Buy American and hire American,” said Trump. “Every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families.”
Stocks retreated slightly and bond yields held steady, but worries about potential trade wars started to resurface.
“He didn’t say the one thing the markets wanted to hear,” wrote Greg Valliere, chief global strategist at Horizon Investments and a long-time observer of the Washington arena. “The financial markets were hoping for a full-throated embrace of tax cuts and tax reform, but they didn’t hear it. It’s coming, later this year, but it may come later than the markets would prefer.” He added, “Prepare for protectionist trade measures, perhaps as early as tonight.”
Within a few hours, Trump was signing executive orders – first mostly procedural matters and items having to do with Cabinet appointees, then an order giving federal agencies the option to change, delay or waive provisions of the Affordable Care Act, beginning the repeal that he promised during the campaign. The new administration also eliminated almost all mentions of climate change from the White House website, and Trump’s Department of Housing and Urban Development (HUD) announced it had rescinded the 25 basis point cut in the annual mortgage insurance premium that the agency, under President Barack Obama, had announced just weeks before.
“We’re now in a holding pattern, waiting for details, waiting for the plans,” says Nick Colas, chief market strategist at Convergex, a global brokerage company, about the sentiment of financial markets based in New York.
“The next few weeks matter a lot … How much of Trump’s agenda can be put through – infrastructure, tax cuts and regulatory rollback. A lot has been promised … We just don’t know.”
That’s why the stock market stalled.
“Investors’ high hopes of the Trump administration’s ability to quickly ramp up U.S. growth and corporate profits may well have pushed the markets ahead of themselves,” says Matt Freund, co-chief investment officer at Calamos Investments.
The bond market, too, may have overreacted, according to Freund. “While rates may drift higher over the first few months of the year as inflation pressures build, we believe fears of protracted long-term rate jumps may be overdone.”