Tuesday, February 21, 2017

Expectations of Trumponomics rejuvenates Trump rally in stocks

Just after many market experts called the end of the Trump rally for the US stock market, the rally resumed February 9th after Donald Trump announced “phenomenal” tax cuts, due in several weeks. All three major American indices, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite Index have recently been posting their all-time highs for several days.
Dow Jones Industrial Average over 6 months (source: marketwatch.com)

Janet Yellen, the chairwoman of the Federal Reserve, put it very clearly on Feb. 15: “I think market participants likely are anticipating shifts in fiscal policy that will stimulate growth and perhaps raise earnings.”
These anticipations are very strong right now and they are overshadowing any sense of caution. Market participant complacency right now, as indicated by the Price to Earnings, or P/E, ratio of stocks (how much higher the price per share is relative to the earnings per share for stocks) which is currently quite high. According to FactSet's John Butters (via businessinsider.com), the S&P 500's 12-month forward price to earnings ratio is currently at 17.6 times, the highest level since June 23, 2004.

At the same time, investor caution, as indicated by the VIX index (an indicator of how volatile the market is, often called the fear index) has been sanguine for more than three months.
CBOE Volatility Index (VIX) over 3 months (source: marketwatch.com)

This suggests that investors appear to be throwing caution to the wind, and bidding up stock values. This would also suggest markets are overbought, but these conditions often persist for long periods of time.
Ukrainian Credit Union Limited

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