The final months of the financial year always tend to be rather volatile in terms of market performance. However, this year is likely to go down into the history books as being one of the most unpredictable and volatile in recent memory. The United States economy is of particular interest, as the movements here will have a knock-on effect throughout the entire global economy. This is why the recent stock market rallies have some investors taking a much more bullish stance than would have been conceivable only a few shorts months ago. What has caused such a paradigm shift and can we expect this momentum to continue into 2017?
Black Friday with a Silver Lining
Black Friday has always been a traditional indicator of the spending habits of the domestic population. The figures emerging up until this point signal that the average consumer is indeed optimistic in terms of the economy as a whole. Both the S&P 500 and the Nasdaq Composite were both much higher; 9 and 18 points respectively (1). This was somewhat reinforced by the modest gains produced by massive retailers such as Target and Walmart.
Has Trump Pulled a (Potential) Trump Card?
Although sales figures have certainly helped boost the American markets, it is just as plausible to observe that some of the economic policies promised by Donald Trump have investors thinking more positively. Some are viewing future tax cuts, fewer regulations and increased infrastructure spending as very beneficial actions that might come to pass after 20 January (2). Big business will particularly stand to benefit and while this may be to the chagrin of the average SME, the fact of the matter is that the gains posted by major corporations should have a trickle-down effect on the economy as a whole. Having said all of this, should we be poised for a record-breaking 2017 fiscal year or is it wise to take more of a watch-and-wait approach?
Expectations Versus Reality
The first thing to keep in mind is that a short-term rally is by no means an indicator of a long-term bullish marketplace. The second variable is the simple fact that president-elect Trump has already reversed many of the positions which were outlined during his campaign. In other words, he was selling an idea rather than outlining specific plans in detail. We are left wondering if he will become more dovish in terms of his projected economic plans.
The another factor to recognise is that the markets will always play to a specific resistance level. In this case, we can argue that the next tipping point for the Dow Jones will be the 20,000 mark. This index has never seen such values and assuming that it is reached, there is no doubt that a sell-off will occur soon after. The big question is how large of a liquidation may be seen and if this will trigger wider selling within other sectors.
What Goes Up…
Assuming that the bulls take the marketplace, we should expect continued positive results between now and the time when Trump officially takes office. However, we need to recall the one fundamental rule of stockbroking. Astute investors rarely buy when prices are high. To put this another way, many traders will be wary of becoming involved with a market that is constantly on the upswing. They have learned this from the 2008 financial crisis. The higher the markets rise, the more analysts will be wondering if we are approaching a new bubble. In some ways, this is a perfectly rational stance to adopt.
The bottom line is that the recent positive figures we have seen emerging from the United States may not be truly indicative of what is around the next financial corner. It is nonetheless wise to become involved with near-term trades, as the chances of turning a profit between now and the end of the year are high.
In order to stay one step ahead of the latest news, always turn to CMC Markets as a reliable source. Stockbrokers of all sizes and experience levels will be keenly watching what is in store during the next few months.