The biggest question on Wall Street is whether the Trump Presidency will be good (or bad) for investors. The year started with confidence as the Dow Jones Industrial Average overtook the 20,000 mark, but many questions remain on how President Trump will address international trade and monetary policies, and how he plans to spur job creation. Here’s a look at some of the factors that investment pros are considering.
The Dow Jones Industrial Average hits 20,000 on Jan. 25
The Dow Jones hit a historical high within days of Trump taking office – breaking through 20,000. It’s taken some 17 years for the Dow to hit this mark – since the market collapse in 2000 – and its climb up from 19,000 on Nov. 22, 2016, makes it one of the fastest 1,000 point gains in the Dow’s history. Is this a big deal? Yes. However, many analysts are quick to note that hitting a historical high packs more of a psychological punch than anything else. Is it meaningful? Well, yes … and no. The Dow is regarded as an indicator of confidence (or lack of it). However, many pundits are anxious to remind investors that the Dow comprises only 30 stocks – and that other market indexes comprise many more companies. For example, there is the Standard and Poor’s 500 or the 2,000 small capitalization companies that make up the Russell market tracker. Depending upon your specific investment diversification strategy, you might not benefit substantially from the Dow’s exuberance. The overall consensus suggests we look on this milestone with guarded optimism. Benchmark milestones move markets, but the tide of optimism might or might not have legs. In the past, we’ve seen records broken only to see the Dow fail to remain above the target milestone for any appreciable time.
“Reflation” and Capital Gains Anticipation
Some brokers are calling the post-inauguration surge a symptom of “reflation,” or a belief that the economy will prosper under Trump’s proposed tax cuts and increased government spending on infrastructure. These plans have yet to be fully articulated, but many investors are betting they will happen. Another element that has contributed to the recent historic Dow high is the anticipation of capital gains tax cuts. Brokers have observed that many investors have not done the usual year-end portfolio cleanup – dumping nonperforming equities – because they believe by postponing it they’ll face a lighter tax bill in 2017, when President Trump cuts capital gains taxes. If a significant number of investors are sitting on the sidelines waiting for more favorable tax terms and a backlog of investors are waiting to take their profits, this could have a negative impact on the performance of major indexes – including the Dow.
The Tide Could Turn – And Fast
Wall Street gurus continue to urge their clients to avoid emotionally charged decisions and to stick with their long-term portfolio planning goals. There are simply too many unknowns ahead. Like him or not, Trump is no ordinary Republican, and we have yet to see how successful he is in cutting taxes and increasing spending without creating a potential deficit crisis. Others note that the Dow’s 20,000-point milestone comes courtesy of a four-year trend that has seen domestic stocks outperforming equities in overseas markets. This unusually long streak has been bolstered by the dollar’s strong run – a positive that can turn negative if foreign borrowers and companies face difficulties paying back debt or buying U.S.-made goods when their own currency remains weak.
The observations above are intended as general commentary and are not intended to be a substitute for advice from your tax and investment professional advisors.