Here’s why stocks reacted so strongly to the Trump presser

The markets, for a short time, had a hiccup round President-elect Donald Trump’s press convention. The massive query: why?

Drug stocks dropped as Trump stated drug corporations will “not get away with homicide.”

Lockheed Martin dropped when he said he would bring the cost of the F-35 fighter jet “way down.” Protection names basically dropped.

However why? Trump has already made these statements. There was little else straight market shifting, but stocks moved. The dollar dropped and bond prices rallied.

The reply lies in the place we’re in the markets proper now: priced for perfection. The market is a little bit like a coiled spring, prepared to get away a method or the different. Stocks are close to historic highs. Client confidence is excessive. Investing sentiment may be very bullish and volatility is low.

That is all excellent news, but it surely’s a risky combine. That is as a result of stocks have moved on expectations that earnings in 2017 are going to be a lot greater than 2016, partly on a greater financial system basically but it surely’s been turbocharged by Trump’s guarantees of decrease taxes, much less regulation and monetary stimulus.

That is the place the threat lies, in the very actual risk that there’s going to be some sort of disappointment. And the market isn’t in the temper for any disappointment.

We noticed this in the third quarter when slight misses in earnings expectations precipitated a notable drop in stocks.

With markets practically 10 p.c greater since then, the nervousness is even better. Evercore ISI stated it completely this morning: the “bar on earnings has risen as expectations for development have elevated.”

What we want, as my colleague Jim Cramer talked about this morning, is a bridge. We want a bridge between the present market mentality that has excessive expectations for a 2017 earnings enhance and the doubtless steering we’re going to get: an try to decrease expectations.

Here’s what wants to occur: the bridge is a perception by market members for the subsequent few months that higher numbers will probably be coming down the highway and that expectations for a lot greater income and earnings development aren’t wildly inflated.

If that mentality takes maintain, the markets can look ahead to a comparatively peaceable few months, with a lot of largely sideways motion.

If the market stops believing that mantra, it is going to be a rocky winter.

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