Wall Street’s animal spirits have been unleashed by a belief that Trump and a Republican Congress will implement a trifecta of pro-business policies: a reduction in corporate and individual income taxes, massive infrastructure spending and a rollback of regulations, especially in the financial services sector.
“I’m bullish,” said David Kass, a professor of finance at the University of Maryland. “The market will do well in 2017 as a result of the fiscal stimulus that’s being proposed by president-elect Trump, in terms of tax cuts in both the corporate sector and individual sector. Proposed deregulation is another positive impact on many industries. I would put a rough estimate of stocks increasing another 10 percent above current levels.”
The Wall Street Journal’s MoneyBeat column noted a forecast of “mid- to high single-digit earnings growth” thanks to oil prices, a growing economy and consistent profit margins.
Investor Steven Eisman, best known for making profitable bets against the subprime mortgage securities, has said he is “very long” on the overall stock market and predicts “a golden age of investing in financial stocks.”
Stocks have been thinly traded most of the holiday week, with the Dow hovering a few points short of the 20,000 milestone, which is a widely followed threshold but bears no particular significance on the market.
All the major indexes were retreated slightly on thin trading Wednesday. The Dow, which finished at its second-highest close ever on Tuesday, fell back to 19,833. The price of crude was at a healthy $54-plus, reflecting major producers’ recent commitment to limit production and return supply and demand to some semblance of balance.
The Stoxx Europe 600 edged up 0.2 percent, led by commodities. Toshiba Corp. of Japan was rocked, seeing its share prices fall 20 percent after warning of a multi-billion dollar write-down.
Economic fundamentals and many analysts point to positive signs that buoy the case for a continued march upward.
The closely watched Conference Board’s index of consumer confidence is at its highest level in 15 years. And analysts expect that S&P 500 companies will show very slight profit growth for the year after several quarters of overall profit declines, according to research by FactSet.
But forecasts are just predictions. Stocks could be undone by a spike in inflation, external events such as a natural disaster, a surprise election, war or any other dose of uncertainty. And some experts say stocks are expensive. They are predicting a subdued 2017 market.
Michael Farr, president of Farr, Miller & Washington, a D.C. investment firm, said people should not be surprised if stocks retreat temporarily in 2017.
“Investors forget markets can go down,” he said. “If you expect as part of owning stock that it will go down for awhile, you are less likely to panic and likely to hold on to it long enough to realize a profit.”
Farr said fundamentals are “okay,” but he attributes most of the increase in corporate earnings to cost cutting and stagnant wages.
Kass said he is not without concerns. He worries that Trump’s threats about raising tariffs on imports could hurt trade, slow the U.S. and world economies and derail the surge in the financial markets.
Kass expects the Federal Reserve to continue gradually raising interest rates by a quarter point several times, which could provide competition for the stock market among fixed income securities such as corporate and municipal bonds and U.S. Treasuries.
“Fixed income securities will gradually become more attractive as interest rates rise, but interest rates are, and likely to remain, at historically low levels even after likely rate increases next year,” Kass said.
The low interest rates could combine with infrastructure and defense spending increases to bolster economic growth.
“Gross domestic product should grow fast, corporate profits should be higher, and therefore I would expect equities to do well during 2017,” he said. “It’s still a very favorable environment.”