Easing global tensions lift market to new all time high
The US equities market broke out to new all time highs this week as easing global tensions clear the way for fundamental growth. The broad market S&P 500 broke above 2,300 for the first time, extending the secular, long, short and near term trends. The underlying story is one of fundamental improvement, the catalyst is a series of events that have helped ease global tensions spurred on by President Donald Trumps protectionist stance.
Rhetoric over the course of the campaign, the post-election period and early days of the administration did little to smooth relations and led many to speculate trade wars were inevitable. The targets were not limited to traditional opponents ; Mexico, Germany and Japan were harangued as often as China. The good news, for market bulls, is that just when tensions seemed on the point of snapping Trump stepped back. He’s met with England’s May and pledged ongoing partnership, he’s placated China with a letter pledging his intent to have open and constructive dialogue, he’s met with Japan’s Shinzo Abe and renewed friendships there, all that is left is for him to mend fences with Mexico and global trade can resume in earnest.
While easing tensions cleared the path it was Trump’s announcement that his tax reform plan would be unveiled in a few week that sparked this week’s rally.US fundamentals were bullish and expansionary before Trump’s election, post election those fundamentals are expected to be supercharged by pro-growth policy. Labor markets are expected to continue improving as deregulation, tax reform, ACA reform and trade policy spur economic activity. Tax reform alone is expected to add as much as 10% to S&P 500 earnings growth this year, doubling already robust estimates. The combination of tightening labor markets, rising wages and increased demand is also expected to lead to a faster pace of inflation and further policy tightening by the FOMC.
The FOMC has long been on a path of tightening, beginning two yeas ago with the end of the Taper. The bank is now set to raise rates 2 or 3 times this year and some think that estimate is low. Regardless, the combination of growth, prospects for accelerated growth and rising inflation has led to a stronger dollar. The Dollar Index bounced from long term support at the $100 level this week and has reversed its near term down trend. The index has advanced more than 2% since hitting bottom in early February with momentum shifted to the upside.
Dollar strength and declining fear is taking its toll on gold prices. Spot gold hit and fell from resistance just below $1,250 and is showing weakness. With risk-on trading back coming back in vogue and dollar outlook strong gold prices are expected to continue falling with a test of $1,200 probably and a break below is likely.
Outlook for the US markets is bullish. If you are waiting for a pull back you might not get it. Market sentiment brightens day by day, eventually the retail market will get on board and the rally will skyrocket. Global indices are not far behind, European and Asian indices are hovering just below long term and all-time highs. While both regions face issues which may mute gains in the near term long term outlook is bullish, new highs are on the way.