Dow 20k has come and gone and the market rally is losing some steam. The recent sideways movement of the markets has us asking whether or not a pullback is in order.
What’s the Holdup?
A major reason for the slowdown could be the dislocation between what businesses and investors were expecting from President Donald Trump and the focuses of his agenda so far. The consensus expectation was that Trump would push through corporate tax reform, fiscal stimulus measures, and repeal restrictive regulations.
Instead, Trump’s executive orders have mainly focused on trade and immigration policies which have much more uncertain outcomes for businesses and consumers, and if there is one thing that the markets do not like it is uncertainty. We are still expecting tax, regulatory, and fiscal measures to be a focus for the administration, but Trump’s executive orders could potentially uncover rifts in what we thought was a steadfast Republican party.
Any pushback from Congress could lead to delays in the implementation of these policies and the market effects will not be felt until later than previously expected. We would not be surprised to see some profit taking and tapering of post-election euphoria leading to a short-term market pullback.
Politics aside, the underlying economic data is still pointing to a strong start for 2017 and early earnings reports have been positive. Any pullback will likely be a buying opportunity and will give investors a chance to rebalance towards attractive areas of the market. Our models indicate that sectors such as financials, materials, and industrials will attract capital in the event of a pullback and should benefit from higher interest rates, less regulation, and a renewed focus on US trade strength.