Market Update

6080137063_3e6c91ee8b_oStocks rallied to new all-time highs yesterday thanks to positive comments from President Trump regarding fiscal and tax policy. The S&P 500 gained 0.58%.

Following the familiar pattern of the last few days (weeks, really) stock futures were little changed through the open Thursday given a lack of economic data and relevant news.

But, that changed shortly after 10 a.m. when two Trump-related stories moved markets.

First, it was his comments at a meeting with airline CEOs that he’s going to have “something” on taxes in the next two weeks that will be “phenomenal.”

Then, The Hill article (link here) came out that said Trump may be open to entitlement reform. That’s positive, because if entitlements come into the discussion, there’s a lot of spending that can be cut to pay for tax benefits (i.e. passage of tax cuts gets more likely).

Both headlines helped to finally send the S&P 500 decisively through 2300, and to new all-time highs.

After a lunch-time breather, the bulls circled the wagons and pushed ahead to another set of new highs in early afternoon trade.

In the final hour there was a modest pullback, as day traders took profits. Still, yesterday’s price action was very positive, and underscored the solid momentum that remains behind this rally.

Trading Color

It was “Trump On” internally yesterday from an index standpoint, as the Russell 2000 rose 1.5%, handily outperforming the S&P 500. Looking at sector trade, cyclicals (banks, industrials and tech) all outperformed.

Financials (XLF) rose 1.4% and was the best performing SPDR we track, as it was powered by the rally in banks (KRE up 1.8%). Industrials (XLI) rose 0.77% and consumer discretionary rallied 0.63%.

Utilities were the only real laggard Thursday as XLU dropped 0.85% on a combination of profit taking (XLU rallied nicely on Wednesday) and selling due to fast money flowing into the Trump trade. Basic materials was the only other SPDR we track to trade down yesterday, but the loss was just 0.04%.

Energy (XLE) was one of the best performers yesterday as well, but while broad cyclical outperformance did help XLE rally, it was also due to a bounce back from recently poor performance.    Point being, energy is not a clear beneficiary of a Trump-On trade at the moment, and I don’t want it confused as such. Once the outlook on oil becomes more stable, energy might again join the Trump-On sectors, but that’s not the case right now.

Airlines were big outperformers (most were up close to 3% intraday) thanks to comments made by Trump at a meeting of airline CEOs that seemed to imply the government might offer subsidies to help airlines compete internationally (most transcontinental airlines are subsidized by their governments, and it pressures fares for US carriers). The rally in the airlines, in turn, sent the Dow Jones Transports up 1%.

On the charts, the S&P 500 hit yet another new high, so clearly the trend remains higher.

Bottom Line

Political optimism can clearly still move stocks higher, but let me be clear—nothing actually positive happened politically yesterday.

First, while Trump’s “phenomenal” tax comment sent markets higher, tax reform isn’t up to him, it’s up to the Senate because that’s where the log jam is.  Trump can propose bills and they’ll easily pass the House, but as I explained yesterday in the reconciliation piece, because Democrats can filibuster in the Senate, it remains the biggest obstacle to passing any meaningful reforms.

If anything, Trump’s restart of a feud with McCain yesterday probably reduces the chances of his agenda moving through the Senate!

Second, The Hill article (and there was a similar article released by the WSJ later yesterday afternoon) about Trump touching entitlements is potentially positive, if it is further substantiated. But, Trump was adamant about not touching entitlements on the campaign trail, so reversing that position has potential political consequences, and it’s a decision that’s likely not to be made quickly.  Point being, it’s a general idea with little specifics, although again we’re watching closely because if entitlements (Medicare/Social Security) are on the table, then the chances of corporate tax cuts will legitimately rise.

Bottom line, stocks want to go higher, and you can’t fight this tape. Yet the gap between political expectations and likely reality widened yesterday, and that does increase the risk of a now potentially nasty and significant pullback, if political reality disappoints markets.

 

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