The US market has started 2017 with a positive return on the S&P 500 of 1.9% and a rather flat, albeit volatile performance, for the US dollar against sterling.
The rally in the market remains supported by the administration’s pro-business agenda, which is expected to include reduced corporate tax rates, an easing in regulation and the repatriation of global assets. In addition, a rotation from bonds to equities continues following a Federal Reserve forecast for three further rate hikes in 2017.
It should be noted however, that in the last days of January our attention has been drawn to a number of flags. A ban on immigrants from seven predominantly Muslim countries triggered the largest fall in the Dow since October and this was followed by the public firing of the acting Attorney General who refused to defend the ban. This would indicate that protectionist policies could trigger a sell-off in the market, as would any failure to implement the proposed pro-growth policies.
At the time of writing the Federal Reserve has commenced its regular two day policy meeting and the bank is widely expected to keep interest rates on hold. Indeed, there is a view that rates may remain on hold until June. We are also in the midst of the corporate earnings season with a third of the S&P 500 having reported and on track for 4% earnings growth. The S&P however, is up 9.25% since Donald Trump’s election victory and valuations are beginning to look a little stretched.
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