A week ago, stocks opened the week after Donald Trump’s inauguration by breaking out of a historically narrow trading range. The stock market briefly ascended to new records before pulling back. Now, it appears, stocks are going in the other direction. Does it mean the Trump rally is over?
It’s probably too early to tell. But given the abrupt nature of the pullback, against the backdrop of several controversial Trump policies including his temporary ban on immigrants from seven predominantly Muslim countries, it’s worth wondering if, in his first couple of weeks in office, Trump has already quashed a lot of the goodwill he engendered on Wall Street after the election.
Did Trump Kill the Trump Rally?
Prior to the up-and-down of the last 10 days, market volatility was at multi-decade lows. After rallying 11% from the second week of November to the first week of December, stocks hit an almost unprecedented pause button, most of which was attributed to investors taking the wait-and-see approach in the weeks leading up to Trump’s inauguration. The perception was that Wall Street was holding its collective breath until Trump took office, to see how many of his numerous pledges he’d follow through on.
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So far, the reality of a Trump presidency hasn’t moved the needle much. And the second leg of the Trump rally has temporarily fizzled before it really got off the ground. When stocks broke to the high side last week, many analysts (including yours truly) saw it as the beginning of an extended rally. Typically, after a long period of sideways trading, when a breakout comes, stocks continue to go in that direction for an extended period of time. That hasn’t happened with this breakout.
After jumping 1.5% in two trading days, pushing past Dow 20,000 for the first time ever and the Nasdaq and S&P 500 to new all-time highs, stocks have since retreated to where they were prior to Inauguration Day. The four straight down days are the most since late October.
Fourth-quarter earnings season results have been mostly positive—the large-cap companies that have reported thus far have grown earnings by an average 4.2%. If it holds up, it would mark the first time S&P 500 companies have posted back-to-back quarters of earnings growth in nearly two years. So that’s not the problem.
There have been no interest rate hikes or negative economic news. Things have been mostly calm in Europe and China, or at least calm enough not to derail the Trump rally. The only thing that can undo the Trump rally is Trump himself it seems.
Wall Street Speaks Out
Right now, the world is watching Trump, seeing what he’ll do next. And when the world responds to a policy such as the temporary Muslim ban with outrage and rallies, investors notice. Some of the most prominent figures on Wall Street—Goldman Sachs CEO Lloyd Blankfein, Tesla founder Elon Musk, Starbucks CEO Howard Schulz, to name a few—have denounced the policy. The fact that some of Wall Street’s most influential voices are speaking out against something isn’t great for business.
Regardless of where you stand politically or how you view some of Trump’s early policies, it’s inarguable that his early days in office have been volatile. Investors tend not to like volatility. And that’s why the Trump rally is losing steam.
With all eyes on Trump, it seems he’s the only one capable of reigniting the rally he started. Stay tuned.
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