PMC Weekly Review - February 17, 2017

A Macro View: S&P Twenty Trillion: Is the Sky the Limit?

Along with hitting fresh new highs, the S&P 500 reached a major milestone this week: $20 Trillion in market capitalization for the stocks included in the index. Equities have continued to climb higher following the November 8 election of President Trump, with the S&P 500 gaining roughly 10% in the past three months. These gains are occurring as we approach the eighth anniversary of the financial crisis’s market low of 676, reached on March 9, 2009, a level which the S&P 500 has now more than tripled. With gains continuing to pile up, and what feels like no losses in sight, one wonders if stocks can continue their march higher, or whether the market has ignored risks that will finally catch up with us, leading to a selloff. 

In examining the recent gains, it can be argued that the market is operating on borrowed time. A Trump victory and a Republican sweep in Congress were not supposed to occur. Most political pundits and polls predicted a Hillary Clinton victory, or, in the unlikelihood of a Trump win, market strategists expected we’d finally experience a selloff. Neither one of these events occurred. Slowly but surely, and without even a single -1% day for the S&P 500 since the election, the market has continued to soar. 

Much of the post-election gains have been driven by proposed infrastructure spending and potential increased growth, which would allow the Federal Reserve (Fed) to hand off the stimulus reins from a monetary authority back to the fiscal realm. This week, the rally has been rekindled by President Trump’s announcement that a major tax reform effort will be released in the coming weeks. Setting aside the Executive branch, corporate fundamentals have been quite strong, with the S&P 500 on track for the strongest profit growth in nine quarters. However, there are risks on the horizon that may not be fully priced into these record-setting highs. 

In the post financial crisis world, one of the greatest drivers of stock market gains has been the Fed’s overly accommodative policies. With unprecedented levels of quantitate easing and zero interest rate policy, investors have been pushed towards risk assets, driving up stock prices. With the Fed considering raising rates three times in 2017, the question of whether the economy and the market can stand on their own should be of greater concern. The Fed is also undertaking this move while European and Japanese central banks have kept their feet pressed on the accommodative pedal. 

Another risk one must consider is President Trump’s America First campaign promises, which may prove disruptive for our international relationships and trade agreements. Only time will tell if the plethora of executive orders is more for show, or if they are indicative of future policies to come. The President’s volatile communication style over the past few months has not yet proven disruptive from a stock market standpoint, but its effects are certainly unknown territory for market participants. 

As we move past the $20 Trillion market cap milestone for the S&P 500, it’s important to realize how far we’ve come in the past eight years. Although valid causes have undoubtedly driven the market higher, investors should exercise caution before discounting the risks that the market may have overlooked in the current rally. Fear and volatility can easily creep back into the market, especially when everyone appears to have forgotten that they exist. 

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