Investors should prepare for a year that could be rough and rocky, at best. Volatility will likely keep roiling markets under what promises to be an unpredictable Donald Trump presidency. And widespread jitters over the mystery of the yet-unknown direction and dimension of Mr. Trump’s policies could turn into a headwind that might unsettle the stock market.
A large part of the anxiety stems from Mr. Trump’s spur-of-moment dictates in reacting to any issue that grabs his attention -- or gets his goat. The reactive president-elect is widely expected to be the same volatile firebrand after his inauguration on Jan. 20 as he has been all through the election campaign. No wonder the forecast is for a bumpy if not sharply erratic market ahead.
The Dow Jones industrial average’s inability to pierce the psychologically important 20,000 level could well be signaling that all won’t be as rosy as Wall Street had initially expected under the Trump administration. True, the S&P 500 stock index and the Nasdaq composite have both recently climbed to new highs, helped by the recovery of technology and banking stocks. However, analysts still believe the incoming president’s intemperate temper will be a constant source of anxiety that can only create confusion in the market.
The most recent episode occurred last Wednesday during Mr. Trump’s first press conference as president-elect. “If anyone still held out hope that the awesome responsibilities and dignity of the presidency might temper or even humble Donald Trump, there was a shock from his first press conference as President-elect, on Wednesday,” said an editorial in The New York Times.
Right now, investors continue to play a waiting game ahead of the presidential transition, hoping that after his inauguration President Trump will promptly act on his promises to accelerate economic growth, in part by cutting taxes; lift oppressive regulations; and spend massively on infrastructure projects. So far, though, repealing the Affordable Care Act appears to be at the top of Mr. Trump’s priorities.
What should investors do? They could well find protection from market volatility by sticking to fundamentals. Indeed, several seasoned analysts suggest the market will continue to be all about earnings.
“Stock prices follow earnings, with those prices determined by discounting potential profits by the cost of capital,” argued Lisa Shalett, head of investment and portfolio strategies at Morgan Stanley Wealth Management. “Contrary to popular belief, we believe the market’s yearend surge and 2016’s above-average return -- the S&P delivered a 112 percent total return -- was built on a material shift in earnings expectations that began with the third-quarter earnings reporting season,” she explained.
“Watch the first 100 days of the Trump administration for clarity on tax reform,” advised Shalett. She sees that issue affecting the market’s perspective, and she suggests that investors should be “active and focus on the fundamentals.”
In the meantime, investors are buffeted almost daily by distracting headlines about Mr. Trump’s testy demeanor, such as openly assailing CNN as a purveyor “fake news” and BuzzFeed as a “failing pile of garbage.”
Also, the continuing issue of Russian hacking of the Democrats has the potential to explode into a major problem for Mr. Trump as a Congressional investigation looms, with some Republicans, led by Senators Arizona’s John McCain and South Carolina’s Lindsey Graham, urging a bipartisan probe into claims that Russia tried to influence the presidential election.
China has become another problem for Trump after his comment that the U.S. doesn’t have to abide by the “one China policy.” Beijing has forcefully said it’s “non-negotiable” that Taiwan is part of China. Some analysts worry that if investors perceive the first 100 days of Mr. Trump’s presidency continuing to be ripped by surprises on the geopolitical and economic fronts, it could only mean the markets here and abroad will be as volatile as they’ve ever been.
Indeed, a lot of important global issues will weigh heavily on the U.S. equity market and can only result in more volatility.
Ed Yardeni, president of Yardeni Research, said in his recent note to clients that until he and his team see a recession coming, “we’ll stick with our long-held view that this bull market will continue to be a series of panic-attack sell-offs followed by relief rallies to new highs.” Yardeni remains optimistic and has raised his target for the S&P 500 for this year to 2400-2500 from 2300-2400. He raised his forecast for the S&P 500’s earnings this year significantly, to $142 a share from $129, on his expectation that “Trump’s tax-cutting proposals will be implemented.”
He conceded, however, that 2017 is already starting out as a “promising year mixed with illusion and confusion.” Yardeni lamented that “it is enough to make one’s head spin.” Nonetheless, given that he sees an “elevated level of bullish sentiment, another panic attack wouldn’t surprise us,” said Yardeni.
Perhaps nothing should surprise investors in 2017.