The Dow, S&P 500, Nasdaq and Russell 2000 each hit new all-time highs on Monday.
Investors are excited and anticipate the continued growth of both large multinational corporations and smaller US-based businesses.
Is this rally due to President Trump’s policies or Federal Reserve Chair Janet Yellen’s influence?
Some experts argue that the surge in stocks is driven by Trump’s plans for economic stimulus and deregulation. Others say it’s an extension of the positive economic trends seen during Barack Obama’s presidency.
Trump inherited a strong job market and a solid overall economy, which may explain the high confidence levels of consumers and businesses.
However, it’s important to note that investors and financial journalists often give presidents more credit or blame than they deserve for stock market performance.
RBC strategist Jonathan Golub emphasizes this point in a report titled “Message to Market: It’s Not All About Donald.”
According to Golub, the S&P 500 rose nearly 7% from late June to Election Day, when most polls predicted Hillary Clinton’s victory.
Since Trump’s surprising win, stocks have continued to rally, increasing an additional 8%.
Bond yields have also risen since Trump’s victory, which many attribute to expectations of economic stimulus under his administration.
However, Golub observes that the yield on the 10-year U.S. Treasury was already rising in the late summer, and many investors expected stimulus from Clinton as well.
It’s strange to credit Trump as the main cause for a rally that began before his election and was driven by expectations of his loss.
The Federal Reserve has played a consistent role during this period. The market’s attention is focused on Janet Yellen, not the White House.
Before the election, the Fed signaled its plans to raise interest rates in December and continue doing so throughout 2017, regardless of the election outcome.
The US economy is steadily growing without overheating, as shown by recent jobs reports and modest wage growth of 2.5% annually, which presents no significant risk of high inflation that would lead to aggressive rate hikes from the Fed.
Even if Yellen and the Fed raise rates three times in 2017, they would do so gradually, only by a quarter point each time, resulting in still historically low rates. Stocks would remain an appealing investment compared to bonds, and corporate earnings should continue to grow.
Investors should pay close attention to Yellen’s testimony before Congress, as her comments on future rate hikes will greatly impact the market’s momentum.
With these factors in mind, it’s clear that the ongoing rally is not solely due to Trump, but a combination of various economic factors and the Federal Reserve’s actions.
CNNMoney (New York) First published February 13, 2017: 12:30 PM ET
