Whether you loved or hated President Trump’s speech to Congress on Tuesday evening, it’s clear that the U.S. stock market went from nearly flatlining on Tuesday to receiving a huge adrenaline shot on Wednesday, lifting the major market averages to new all-time highs, and the Dow Jones Industrial Average by more than 300 points to close above 21,000 for the first time in history. Over that past two decades, large swings in the stock market were more likely to have been associated with comments or actions from a central banker, and not from a sitting president. We have to go back to President Bill Clinton’s term in office to find a time where the stock market was making new highs driven in part by a pro-growth presidential agenda.
It used to be that investors turned to central bankers like the Federal Reserve or the European Central Bank for direction on the economy and how to allocate their capital within the financial markets. Over the past two decades, from Federal Reserve Chairman Alan Greenspan to Chairman Ben Bernanke, and now Chairwoman Janet Yellen, investors have tried to follow the money in order to ride the coattails of the central bank where possible. I say used to because that’s the way it was up until last week just before President Donald Trump spoke to Congress on Tuesday. In fact, following Monday’s close of this past week it was beginning to appear as though the stock market’s recent advance was likely running out of steam, particularly after posting a gain for the 12th consecutive day in a row, an event that has only taken place two other times in the last 120 years (there has never been a 13-day streak).
To be fair, Trump’s comments shouldn’t get all the credit for the market’s oversized rally on Wednesday, but it clearly lit the fuse. Don’t forget there were a fair number of investors early in the week who thought the market was going lower, at least for a few days, and had started to short the market in hopes of making some money on the way down. Some of these investors likely decided to reverse their short position, creating what is called a short covering rally. Additionally, in a report earlier this year, Aldridge and Krawciw estimated that in 2016 the daily trading volume on the stocks exchanges by computers, also referred to as algorithmic trading, accounted for 10 to 40 percent of the daily volume here in the U.S. This means that some of Wednesday’s rally, and Thursday’s decline, can also be attributed to computer programs trying to make a buck, and not just enthusiastic investors.
The point is not to diminish the impact of Trump’s comments on the stock market, but to keep a sober view of the short-term nature of some market rallies. In a larger context, what we are likely seeing, and maybe relearning, is that a pro-growth economic agenda is a powerful thing and should not be underestimated, if it can be supported by Congress later this year. This is a time when patience is a virtue. The problem some investors may have, particularly those who support the president, is becoming overly aggressive with their portfolio at a time in their life when they should be reducing their risk.
Looking ahead, the stock market still has to maneuver past the March FOMC meeting to be held on March 14 and 15. Like a 5-year-old on Christmas Eve, investors tend to get a little anxious just before the Fed’s interest rate announcement. Give that Yellen has left the door open for an interest rate increase this month, this time shouldn’t be any different.