The Dow Jones Industrial Average broke through the 20,000 mark for the first time ever on Wednesday, 64 days after reaching 19,000 and 78 days after President Donald Trump’s surprise election victory.
Despite all the pre-election warnings of doom, the market’s reaction to Trump has actually been pretty good. Stocks have posted a historic post-election surge — the S&P 500 is up more than 9 percent, fueled in part by enthusiasm for Trump's fiscal stimulus platform. The post-election gains have outpaced the impressive rallies seen after the election of similarly anti-regulation Republican Presidents William McKinley and Calvin Coolidge.
The milestone, as Senior Index Analyst Howard Silverblatt of S&P Dow Jones Indices wrote Tuesday, “is a physiological and emotional point, which investors should use to review their holdings and performance. It is not, in and of itself, a trading point (except for a few momentum short-term traders).”
But even as Wall Street eyes the next 1,000-point milestone, there are reasons to be cautious. Sam Stovall of CFRA Research notes that since 1953 stocks have risen an average of 1.6 percent in the first 100 days of a president's first term. Yet as the future under the Trump administration comes into focus, the risk of policy mistakes is rising as well. The "honeymoon" period is over; now the difficult task of governing begins.
Credit Suisse analyst Andrew Garthwaite worries Trump could disappoint on corporate tax cuts and/or protectionist trade measures, both of which could weigh on profitability. Too much in the way of fiscal stimulus and individual tax cuts could also push the labor market past full capacity, lifting wages and weighing on earnings growth.
Potentially adding to the difficulty is the fact that both the economic expansion and bull market are long in the tooth, that the Federal Reserve is tightening policy and that Republicans in the modern area tend to face recessions early in their presidencies.
Gluskin Sheff economist David Rosenberg has been hammering this message home to clients recently, exhorting people to realize that while the president is important it's the Federal Reserve that is the true driver of the business cycle and the stock market. He notes that both Presidents Bill Clinton and Barack Obama — widely seen as "good-for-the-economy' presidents — benefited from simulative policies from the Federal Reserve as they both came into office after the conclusion of rate-cutting campaigns.
For years under both of these Democratic presidents, the Fed kept interest rates below a "Taylor Rule" neutral level. Stocks soared.
Yet under Presidents Ronald Reagan, George H.W. Bush and George W. Bush, the Fed was tightening policy early in their first terms or had just completed tightening campaigns, resulting in economic weakness and stock market declines.
By this metric alone, stocks look set for a difficult path under Trump.
Throughout Obama's eight years, the Fed has raised interest rates only twice (for a total of 0.5 percentage points). But in December, after Trump's win, Fed officials penciled in another three quarter-point hikes for 2017, as the specter of inflation returns. Last week we learned that consumer price inflation — driven by shelter and fuel costs — has already risen past the Fed's 2 percent annual target.
Put simply: Unless Trump can convince Fed Chair Janet Yellen to ease up on the rate hikes — or replace her with someone more cooperative — the bull market could soon end. We'll know more when Yellen and her cohorts hold another policy meeting at the end of the month.
Now, the silver lining: For millions of Main Street Americans, who have watched as the benefits of the Obama recovery have largely accrued to Wall Street and the wealthy, this may not prevent a reversal of fortune under Trump.
Policies like a personal income tax cut, renegotiated trade deals, a border tax, a clampdown on immigrant labor and increased infrastructure spending could all boost labor's share of the economy, which has dwindled in recent decades as corporate profits have surged to record highs.
It seems like a long shot, I know. But so did Trump's chances of winning the White House in the first place.