Given all this furore and uncertainty, one would expect investors would be selling due to uncertainty and heightened risk. The markets should be plunging.. However, for three days in a row now the major S&P/ TSX Toronto index has hit new highs along with the three major indices in the US. Are there headlines and roars of approval from the press? No! It is barely worth mentioning. Even the business press appears not to bother headlining what one would think would be historic events for the business world. I could find nothing on You Tube about todays markets!
The S&P/TSX actually rose for the seventh straight day now. It was led by gains in the financial services sector after there was strong economic data from both the US and Canada. The TSX index rose 58.92 points to 15,844.95 or 0.37 percent. Michael Sprung
of Sprung Investment Management said: "People are trying to run with the herd and I guess the big danger is that when you run with the herd you might get trampled at some point. One's got to be very conscious of valuation and what they're paying for securities." Manufacturing sales rose in December for the second consecutive month. US retail sales and inflation both rose in January sending bond yields higher.
Data showed Canada's manufacturing sales jumped in December for the second month in a row, and that U.S. inflation and retail sales climbed in January, helping to push bond yields higher. The higher yields reduce the value of insurance companies' liabilities and increase the interest margins for banks. Since the election of Trump on November 8 last year the financial sector has gained more than 14 percent. The TSX index has rallied more than 37 per cent since a three-year low hit in January last year.
Energy shares rose by 0.7 percent in spite of US oil stockpiles reaching record highs. However, US crude prices dropped by nine cents a barrel. The telecoms group rose a substantial 1.8 percent as Manitoba Telecom Services had its sale to Bell Canada Enterprises approved. Gold prices rose.
In the US the S&P 500 also notched up its fifth consecutive session of new highs. Investors are expecting that Trump will soon announce a cut in corporate taxes. There were larger than expected retail sales and consumer prices rose. Corporate earnings growth was the strongest in two years last quarter. At a recent meeting with top executives of US retailers, Trump promised that he would substantially lower taxes and simplify the tax code. He has also promised fewer regulations.
Federal Reserve Chair Janet Yellen indicated that the US Federal Reserve was likely to raise interest rates at an upcoming policy meeting. The odds
for a Fed rate hike in March rose to 42 percent from 30 percent two days ago. The inflation rate for January was 2.5 percent. Brad McMillan of Commonwealth Financial Network said: "A year ago, if Janet Yellen had come out with the statement she made, the market would have freaked out because the fundamentals were very soft. Now, if the Fed raises rates it's not going to shake the world because people are confident enough about the fundamentals." Michael Shaoul
CEO of Marketfield Asset Management said: “The January US CPI report is a strong set of data which justifies the belief that reflationary forces have been building within the US economy in recent months well in advance of any legislative program being enacted by the new administration.”
US financials rose 0.74 on the expectation of higher interest rates. The Dow Jones Index (DJI) rose 0.52 percent to 20,611.86. The S&P 500 had about the same percentage gain at 0.50 to reach 2,349.25. The Nasdaq added 0.64 percent to 5,819.44. Fourth-quarter earnings for S&P 500 companies rose approximately 7.2 percent, the best expansion since the third quarter of 2014. For the first quarter this year, earnings are expected to grow even more by 10.7 percent.
Investors are obviously confident that the economy can stand higher interest rates. They are also expecting not only lower taxes and less regulation from Trump but also stimulus spending on infrastructure. There was a selloff in Treasuries while stocks reached new highs. The global MSCI
index also closed at a record for the first time since may 2015.
Many in the Trump administration have connections to Wall Street. The US Treasury Secretary Steven Mnuchin is an ex-partner in Goldman Sachs. Mnuchin was confirmed on Monday. Mnuchin was finance director of Trump's presidential campaign. At one time Mnuchin also ran OneWest Bank from 2009 to 2015 which became known as a Foreclosure Machine due to its actions during the financial crisis. Part of his job is imposing sanctions but he said nothing about removing sanctions from Russia. Mnuchin
said: "Our current sanctions programs are in place, and I would say sanctions are an important tool that we will continue to look at for various different countries … the existing policies are in place." Mnuchin claimed that Trump's plan to reduce corporate and income taxes would stimulate economic growth and enable the government to increase revenue to reduce the debt. He also wanted to increase the debt ceiling as soon as possible.
The investment community must feel that the Trump administration as a whole is pro-business. While some Trump policies may send parts of the liberal establishment into a tizzy, the investment community as a whole appears to find the Trump administration overall to be friendly toward Wall Street and corporate profits. Perhaps, as Nouriel Roubini predicts the stock market honeymoon with Trump will soon be over but as of now the markets continue up even while the political situation moves from crisis to crisis, at least if you believe the media.