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March 2017 Market Update

The “Trump effect” continues to play out in the equities markets which surged to new heights Wednesday morning (March 1), a day after the President’s address to Congress. The Dow closed at over 21,100 points, a 300-point increase over Tuesday’s close. The surge in stocks was accompanied by a sell-off in bonds, pushing the 10-year Treasury yield up to 2.46%, an increase of ten basis points for the day. Odds of the Federal Reserve increasing rates again at the next meeting of the FOMC later this month (March 14-15) are said to have increased to 70%.

The exhilaration in the equities markets and rising bond yields indicate that the markets expect President Trump to be successful in cutting taxes are reducing regulations, and that these moves will improve economic growth. It is no accident that the latest surge on the Dow Jones came the morning after President Trump’s Congressional address. Clearly, the markets liked the more “presidential” Trump on display Tuesday night. His cooler tone and more even performance reassured investors that a more disciplined President Trump will emerge, and that the Republicans up and down Pennsylvania Avenue can work together to enact some of their business-friendly policies that the recent election made possible.

We shall see. Much work needs to be done after a hectic and uneven start to the new administration. And leadership will be required to bring together the many competing interests that need to be appeased. Within the Republican party, there remain strong divisions between the “tea-party” wing advocating for smaller government at all costs, and moderates who support spending money on infrastructure projects that would benefit their districts. Democrats show little inclination to cooperate with an administration that has prioritized keeping its base happy over trying to win over opponents.

And there sure have been a lot of distractions along the way. A short list would include questions about Trump administration dealings with the Russians; a poorly executed immigration ban; a ramping up of deportations; and unexpected difficulties in trying to repeal and/or replacing the Affordable Care Act, better known as Obamacare. The Trump administration seems to be trying to do everything at once, with few successes to point to.

Still, the markets are in a forgiving mood and believe that these distractions will sort themselves out. The new administration may have gotten off to a chaotic start, but the markets remain convinced that the new President – with the eager cooperation of a Republican Congress – will be able to push through meaningful tax reform, deregulation and a host of other business-friendly policies.

The intersection of politics and business is always complicated. This seems to be especially true today. Keep your eye on the prize, the markets seem to be saying, and the economy could enter a new period of expansion and prosperity. But the flip side of the coin is that continued chaos and infighting could spook the markets and send the indexes right back off their highs.

For now, the markets are happy. Whether they stay that way is an open-ended question. Much will depend on Trump himself, the battles he chooses to fight, and how well he can work with others in his own party and in opposition to him. One thing is for sure. Every day is a new adventure.


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