Washington Worries Wall Street

2/6/2017


The Dow Industrials and Dow Transports closed at fresh all-time highs on Jan. 26, reconfirming the bullish primary trend. But the averages have been unable to build on those new highs, partly because of uncertainty on what to expect from the Trump administration. Our Focus List and Buy List have 99.5% in stocks, while our Long-Term Buy List has 93.6%.

Protectionist bent

It seems safe to attribute much of the rally since November to two things: (1) improving expectations for U.S. and global economic growth and (2) optimism about changes in Washington.

Despite a slightly disappointing read on U.S. gross domestic product for the December quarter, the case for improving growth remains intact. U.S. employment numbers for January suggest hiring remains robust. Domestic factory activity rose for the fifth consecutive month in January, reaching a two-year high. Consumer spending has advanced solidly.

Meanwhile, growth in the eurozone economy is keeping pace with U.S. growth. Growth in developing nations is expected to pick up in 2017 and 2018, reflecting firming commodity prices. And the International Monetary Fund recently lifted its 2017 forecast for China slightly, helped by government stimulus.

However, investors are worried that all this good news could be undone by a trade war, as President Trump has shown a protectionist bent since his inauguration, with calls for new physical and economic barriers with Mexico.

Also, the election brought hopes for lower taxes, fewer regulations, and more infrastructure spending. Those initiatives could be imperiled by fights on immigration, health care, and other divisive issues. Perhaps most important, hopes for a straightforward decrease in the corporate tax rate have taken a hit — partly because some in the administration and Congress want to tie such a reduction to a new border-adjustment tax, which would tax imports and exempt exports.

Conclusion

No matter how despondent or excited you are about the direction of the country, it's a mistake to let emotions drive your portfolio allocation. However, politics is likely to play a bigger-than-normal role in this year's stock market, and we intend to keep an eye on the market's reaction to news from Washington.

In particular, we intend to watch the Jan. 26 closing highs of 20,100.91 in the Industrials and 9,468.77 in the Transports. Those highs, reached before the controversy surrounding the administration's travel ban, marked the end of Trump's brief honeymoon on Wall Street. A rally above those levels would suggest the bullish trend remains intact.


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