The surge, also referred to as the Trump rally surely contains a factor of investor optimism, enticing vision and excitement – characteristic for those seeking risk and its return, but seems to be lacking part of the driving force which is based on hard facts and emotionless wisdom. Market excitement on what is about to come when Donald Trump takes office is seemingly obvious due to the corporation-friendly policies on federal spending, taxes and regulations, the protectionist stance that will allegedly up the American game against other big economic players along with a domestically oriented perspective on foreign policy. However, with the Inauguration yet to come, experts doubt whether stock market prospects are in tune with reality, which still remains ambiguous. The current psychological characteristics of US equity markets point in the direction of a bubble mentality.
S&P 500
© Bloomberg
With P/E ratios rising excessively, many analysts note that it is just the P that constitutes the trend. While earnings have also been on the rise lately, they do not build up enough of the value for the price to be fundamentally balanced. This however, could go on for a long period of time, say experts, leading to a burst in the far future.
The rally kicked off with fundamental cues, namely promising company reports and economic data just some time after Donald Trump's statements that the stock market is in a "big, fat, ugly bubble". He later added that even a slight hike in interest rates would bring it crashing down, but was proved wrong when the Fed raised interest rates in December and equities extended the rally. During their meeting, members of the Federal Reserve recognized a trade war under Trump as the major downside risk for the economy - and this is not the only Trump-related factor that should affect markets adversely.
Trump's stance on several questions addressed in the pre-election run, such as climate change and immigration policy has softened after the Election. Furthermore, anything Trump wants to do, the Congress has to approve of – meaning that there is quite a chance that many of the pre-election promises will not come to life in the next four years. Some of the reforms might be too big to carry out and some of them might not bring the value promised. Markets have failed to recognize the threats stemming from the protectionist policies and tensed foreign relations that should have put some adverse pressures on the prospect-based equity investment run.
While experts are quick to notice the major psychological and emotional nature of the current market drivers and identify a bubble when they see one, opinions divide on when it all will come tumbling down – some believe the burst is near, while others say years could pass before investors start taking out their money from US stocks.