This remarkable US stock market “Trump rally” has steamrolled through the first quarter of 2017. Catching many investors by surprise, it has demonstrated upward momentum nearly day after day and has done so with minimal pullbacks. New highs have been set repeatedly on the popular averages.
Delving into the details reveals a more disaggregated market. Large-cap stocks have vastly outperformed small caps. Is this a warning sign of a bear market, or is it a correction of the previous outperformance of small caps? That answer will be revealed over the next few quarters. Similar questions can be asked about sectors. And heavy capital weight stocks like Apple (NASDAQ:AAPL) transfer their performance results to sector and industry ETFs.
We think the key element with regard to ongoing stock market strength is the political outcome of the proposed tax cuts. The Brady memo outlined a tax strategy. It enumerated rates and concepts. Markets liked it, and economic agents did too – the NFIB survey data confirms that. But advancement of the tax proposal now seems to have been deferred, and the political process is obfuscated by Trump’s belligerency (his Feb. 28 address to Congress being the exception) and his launching of an attack on Obamacare as the first element of policy change. Markets don’t like that.
We think the future stock market’s performance and eventual higher stock prices and economic recovery are dependent upon the delivery of tax reform by the Trump administration. The longer that process takes and the more questionable the outcome, the higher the risk to stock prices and the slower any advancement. We have been invested in selected ETFs and have held a variable amount of cash during the entire quarter. That could change at any time, but we currently have a strategic cash reserve in our US stock market-oriented ETF accounts.