Stocks Are At Record High
Stocks prices surge as US economy looks strong and global outlook for the world economy is improving.
Dow Jones hit 21,000 for the first time as most of the FED officials gave hawkish tone and assured the investors about the soundness of the US economy.
It only took 24 trading sessions for Dow to advance 1000 points. Rally is supported by the assuring talks of FED officials about the soundness of the economy and also the expectations that Trump will stimulate the economy with his pro growth policies.
What is Under The Stock Rally?
With the stocks advancing rapidly and making new all time highs , one wonders that what is supporting this rally. Since Donald Trump got elected, markets only went to one way, up. Markets advanced too fast and the reason behind this is the promises Trump gave to stimulate the economy with various fiscal policies , such as tax reform, deregulation and
On the fundamental side there is not much support for this stock rally , earnings are not strong enough to propel the rally and stock valuations are at record highs. One thing I noticed is that companies are growing their earnings but their sales are not growing that fast compared to their earnings, reason for this is the buybacks, thanks to the low interest rates companies can borrow nearly for nothing and steroid their earnings with share buy backs.
So to summarise surge in stocks ,it is based on expectations not on fundamentals. But the markets priced in as the expectations have already happened.
Rate Hike and Equities Rally?
Remember last year , every time FED talked about hiking rates we saw sharp sell off in equities and seems like the case has changed now because FED is talking about hiking rates is appropriate and Equity markets are rallying. So than what changed now?Apart from the stronger US an global economy, the game changer is Donald Trump, If he didn't get elected and if there was no talk about his pro growth policies especially tax reform , I don't think that tightening would give boost to stock market rally , investors are assuming bringing tax reform will make US corporations more profitable, giving them an edge to compete anywhere and lastly unlock more free cash flow by paying less tax and bringing offshore money in, therefore possibility of more share buybacks and higher share prices. This sounds good but we did not see any act about the tax reform yet the market is priced in like tax reform already happened. If we see a rate hike in March meeting and If President Trump cant hold on to his promises about his pro growth policies than all this stock rally might come to an end. As mentioned before this rally is based on expectations and technical not merely on fundamentals.
Will Stock Prices Continue To Rise?
I believe that stocks have further way to go if President Trump can accomplish to deliver his pro growth policies. Financials are going to be benefitting from the raising interest rates and deregulation, but there are few sectors like retailers might get hurt If Trump increases the tariffs on imports this would cause increase in the price of goods retailers importing from various countries to sell in their shelves. Overall there is a positive outlook for the stocks but only if Trump can accomplish to deliver his pro growth policies, if he fails to do so there is not much of support to push markets upwards