Donald Trump’s big address to Congress last night is being hailed as a success, with the president giving a calm, measured speech on his vision for America. Markets gave their verdict this morning: the S&P 500, Dow, and Nasdaq indexes all opened higher, and quickly rose by more than 1% in early trading.
Going into the high-profile speech, some expected the “Trump trade” to unravel if the president didn’t provide details on his aggressive plans for lower taxes and higher spending. But promises of “historic tax reform,” a $1 trillion infrastructure bonanza, and a big boost to military spending—all delivered in a “presidential” manner—seem to be enough to convince investors that their optimism is justified.
Markets have been on a historic run since Trump was elected. The S&P 500 index has set 12 record highs so far this year, while last month the Dow set a new high on 12 days in a row. Today’s rally is being paced by the big banks, with Goldman Sachs and JPMorgan Chase both trading at all-time highs.
How long can the rally last? Investors will, eventually, want more detail on taxes, trade, and infrastructure—Trump’s next test will be when his budget for the next fiscal year is sent to Capitol Hill in mid-March.
Meanwhile, equity valuations remain stretched—the market’s price-to-earnings ratio hasn’t been this high since the dot-com-bubble. The S&P 500 has gone more than 100 consecutive days without a 1% decline, the longest streak since 1995, according to Goldman Sachs.
For now, the rally is getting additional support from the expectation that the Federal Reserve could hike interest rates this month. The odds of an increase in March surged to 80% after William Dudley, head of the New York Fed, said the prospects of tighter policy had become “a lot more compelling.” Data out today showed that US manufacturing activity is expanding at its fastest pace since mid-2014, giving the Fed more confidence to “normalize” its monetary policy.
But behind it all is Trump. Sticking to what’s on the teleprompter in one speech is not enough to spark a rally on its own, but the president has also shown that he can spook markets when he veers wildly off-script (paywall). More performances like the one at the Capitol yesterday, combined with an economy picking up steam, and this historic market rally may have even further to run.