What is Driving the Trump rally?
The stock market has stormed ahead under the administration of Donald Trump. After a big run-up from November 8, 2016 to year-end last year, the S&P has risen another 8% this year while the Nasdaq composite is up another 15%. Many thought that the stock market was rising because of hope that Trump would pass healthcare reform or tax reform favorable to the economy, but those have not happened yet. So why has the market done well anyway?
Stocks were probably in for a pretty good 2017 no matter who won the election. After a catastrophic year for energy and financials last year, oil profits and bank profits have rebounded, helping improve overall profits of the companies in the S&P 500 by 15%. As earnings go, so do stock prices.
Another driver of stock prices this year has been technology companies. The technology bull market of 1999 was driven by internet and telecom companies with minimal profits and the technology hardware companies supplying them like Cisco and JDS Uniphase. The result was excess inventory that took years to work off, killing the stocks. This tech cycle, in contrast, is driven by tech companies like Google and Facebook that not only generate rich cash flows but do not carry inventory. Companies that carry no inventory are not subject to the wild ups and downs of past tech hardware companies. Skeptics expecting this tech cycle to bust may be disappointed.
Finally, while Trump may not yet be achieving legislative results to support his promised economic reforms, he has halted the bias of the Federal government to increase regulations and taxes. This is important in and of itself because, as Ken Griffin of Citadel said recently, businesses need predictability to plan forward, and markets need predictability to value stocks at a premium. Stability of the regulatory and tax regimes provides exactly that. Moreover, markets that had been anticipating more regulations and higher taxes are now pricing in a lower regulatory and tax regime, providing a tailwind for stocks.
I have never seen an environment in which incumbents are being upended at such a rapid pace. Blue chip staples of yesteryear are going by the wayside at a rapid rate. Telcom companies are being commoditized. Brand values are declining as consumers trust their Facebook friends more than brands and shelf space is no longer selling at a premium given direct shipments by Amazon. Media companies are being upended by cord cutters who enjoy their entertainment free over the internet. Pharmaceutical company patents are losing value to biotech innovators who are revolutionizing medicine and health care.
This type of environment favors the disruptors like Amazon, Netflix, Facebook, and Google (now called Alphabet). Investors who have stuck with the innovators rather than the blue chips of old have been richly rewarded while not running extravagant risk. These stocks have surprisingly low volatility despite experiencing rapid growth at an early stage of their lifecycles. Disruptors now represent five of the six most valuable companies in the stock market. This gives them disproportionate impact on the indexes.
Is this bull market attributable to Trump? Or is Trump fortunate to have become president at an amazing time to be investing in America. Truth be told, it is a bit of both.