Originally posted at Briefing.com
It's the stock market's world right now and the rest of us are just living in it. That world is filled with anticipation of faster economic growth, stronger earnings growth, and higher inflation.
That perspective has taken over on the other side of the election and it is clear to see in more ways than one. Since Election Day:
- The Russell 2000, which has a strong domestic orientation, is up 10%
- The S&P 500 financial sector is up 11%
- The yield curve has steepened with the spread between the 2-yr note and the 10-yr note widening 22 basis points to 123 basis points
- The U.S. Dollar Index has rallied 2.7% and is at a 13-year high
- The Dow Jones Transportation Average has surged 5.3%
There are other variables in the growth-oriented mix. Really, though, it comes down to just one consideration: It's the economy, stupid!
What Dreams Are Made Of
Bill Clinton's campaign strategist, James Carville, made famous the pithy expression, "It's the economy, stupid," when trying to keep the campaign staff on message in the 1992 presidential campaign.
As we all know today, it was a harsh-sounding message that resonated with voters as Bill Clinton ultimately won that campaign.
Carville's line resonated in the latest presidential election as well, with a number of pundits (or shall we say sheepish pundits?) suggesting after the fact that a prolonged period of lackluster economic growth, and little to no income growth, proved to be the deciding factor for many disenchanted voters.
Accordingly, with the Trump Administration pushing to pass what it deems to be pro-growth policies in President Trump's first 100 days of office, the stock market has turned downright giddy at the thought the U.S. economy might finally achieve escape velocity.
That isn't a guarantee of course. It's a big, imperfect, and interconnected world.
Things can happen to disrupt the best-laid plans and people can react in unforeseen ways. For instance, tax cuts might lead people to save more, not spend more, a terrorist attack/military action could divert resources from infrastructure spending to defense spending, or trade battles could arise with a protectionist orientation.
It doesn't take much to dream up risk factors. It does take more, however, to dream of growth days gone by returning again because they have been missing for so long.
That's probably why the stock market has reacted as strongly as it has, because it is anticipating the economic future looking more like the pre-financial crisis past.
It is a speculative feeling of course, because nothing has actually happened yet, but we have seen time and again how speculation, not to mention group-think, can move stock prices in a big way in a hurry.
The stock market has a rose-colored view of things right now — or perhaps we should say money flows have painted over negative outcomes for the time being.
To wit, the main consideration for the stock market right now isn't how the national debt will increase with fiscal stimulus, but, rather, how fiscal stimulus promises to jumpstart growth.
No one knows for sure what the future holds, but it really will be all about the economy in the months ahead. It is going to dictate a whole host of important drivers.
- The economy will dictate the path of monetary policy
- The economy will dictate the pace of inflation, which will dictate the direction of interest rates
- The economy will dictate the trend in earnings growth
- The economy will dictate the confidence of consumers and businesses
- The economy will dictate economic activity abroad; and
- The economy will dictate approval ratings for the new administration
What It All Means
Yes, it's the economy and it's all about anticipation right now in the stock market, which brings to mind the opening verse from Carly Simon's song Anticipation:
"We can never know about the days to come,
But we think about them anyway,
And I wonder if I'm really with you now
Or just chasin' some finer day."
To be sure, nothing has changed in a definitive, fundamental sense to warrant a $5 billion increase in Caterpillar's market capitalization in six days. The only real change has been in the market's mindset.
In the case of Caterpillar, investors are anticipating an improvement in the company's top and bottom-line with the implementation of an infrastructure spending program. They have good reason to think that way, only the proof has yet to be seen on Caterpillar's income statement.
The same can be said for a number of other companies that have ridden this wave of anticipation.
There is no denying that the anticipation of pro-growth policies has had a significantly favorable impact on the stock market in the past week or so.
Only future economic data will determine if the stock market had it right with its post-election rally. That data, though, may not fully avail itself until the middle, or latter half, of 2017 when new policies implemented in the first 100 days of President Trump's administration start having some impact (or not) in a real economic sense.
That might seem like a long time to wait, yet the stock market's behavior of late suggests it is already there and that the rest of us living in its world will like what we see when that time actually arrives.
We'll see. The anticipation is killing us (and stock market bears).