February 13, 2017

Expectations Driven Market

The "Trump Bump" into December was followed by mostly sideways action, as investors digested earnings and the potential benefits of a Trump administration. At the heart of the action has been the anticipation that the administration will cut Dodd-Frank to bare bones. This will free up lending practices and will cut costs. What you need is the other side of the equation... demand. With Republicans in charge of all three houses, there is a very likely outcome of a significant infrastructure stimulus package. After 6 years of Republican obstruction to an expanded budget without offsetting cuts to programs, the question will be, will congress now pass a stimulus plan that is unfunded, now that it is a Republican president? The answer, although there will be objections, will be "yes".

 

However, today's pop in Financials, which has let the major averages to new highs, is more likely due to Trump's meetings with two key financial and trading allies, Japan and Canada. Having pushed through these meetings without causing controversy, the market is relieved and our key trading partners were not pushed too hard on Trump's pledge to back out of TPP (Trans Pacific Partnership). Calamity avoided... market trades higher.

 

Fed Chairman Janet Yellen will speak before Congress this week. Expectations are that she will lay the groundwork for rate hikes this year, possibly as soon as March. A steeper yield curve is good for financial institutions, as there is a broader spread between the borrowing rate for banks and the lending rate to consumers.

   

In summary, the supply side is set to improve with looser capital requirements and less regulations. The demand side is likely to improve as government spending on infrastructure spurs economic growth. The profit side improves as rates edge higher. As goes the financials, so goes the market. That is what we've seen today and what we need to keep a close eye on this week and the weeks to come. If Financials falter, it will be hard for these new highs in the averages to be sustained.

 

Marc

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