Mushy markets in March

Investors took a break this week from the on-going Trump rally, even as the pace of change in Washington seems to be accelerating. Both the financial downside and political upside should be positive for your investment portfolio overtime.

The minor consolidation I have been expecting in the stock market began this week. The averages have pulled back a little, but the S&P 500 Index, for example, has loss less than one percent from its all-time highs. That’s not exactly the end of the world…

I see a meandering two steps back, one step forward, kind of market with the downside risk somewhere between 2,300 and 2,330 on the S&P 500 Index. That would equate to about a 4% move. As pullbacks go, that would be minor and necessary given the stupendous gains we’ve seen since November.

Some readers, mostly Trump-haters, (and there are a lot of them in this neck of the woods) have asked why I am so positive on the markets right now. It’s simple: hope is a powerful motivator for stock market investors. So far, that hope has been justified.

The repeal of Obamacare was one of the new president’s major campaign pledges. This week, Congress began work on repealing and replacing the Affordable Care Act (see yesterday’s column “America’s road toward universal healthcare.” Not bad, for a president who has only been in office for 49 days.

His trillion dollar infrastructure project campaign pledge was this week’s focus in the Oval Office. Work is also progressing on federal cost-cutting, while regulation after regulation is coming under scrutiny from cabinet members/businessmen who, by their very nature, hate waste and inefficiency.

Bottom line, this guy is not only doing what he promised to do in the campaign, but he appears to be doing it with a single-minded purpose. So those who can be at least neutral about this president, (a hard place to be in this divided and polarized nation) he gets an “A” for effort.

Friday’s non-farm payroll report, the first employment data that can be attributed to the Trump Administration, came in much better than expected—227,000 jobs versus and expected 175,000 gains. It appears that more than just stock market investors are hoping for a better environment. American small business owners, who are responsible for the lion’s share of U.S. employment, are among those who hope for a better business climate under Trump.

The question will be whether that employment number will convince the central bank to raise short-term interest rates next week. Although the headline numbers look great, the Fed usually looks at details such as whether wages also rose. They didn’t. The economy, meantime, is still not growing at an accelerated pace. The Atlanta Fed actually reduced its first quarter GDP growth rate from 1.3% to 1.2% this week.

The Fed Funds Futures market is telling us that bond traders are nearly certain that a rate hike will occur on March 15. I believe that at least part of the reason markets have turned mushy this week is in reaction to this event.  Rising interest rates, no matter how small, concern investors greatly. I believe that rising interest rates, not Trump, are the main obstacle to further gains in the stock market this year.

But as long as central bank policy remains moderate, with small rate hikes, spaced widely apart, the stock market can adjust and continue to climb. If, however, the Fed becomes more aggressive, for whatever the reason, then all bets are off.

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