What Would Make the Rally Resume


This year, March came in like a lion and went out like a lamb—for the stock market, at least.

On March 1st, the Dow Jones Industrial Average closed at a record 21,115.56. On Friday it closed around 450 points lower. The Standard & Poor’s 500 index fell 1.2% during the month.

Only the Nasdaq Composite index continues to hit new highs after five straight days of gains. It has soared 10% in the first quarter as biotechnology stocks made a big comeback and monster stocks like Apple and Amazon hit all-time highs. That’s spectacular, but the Dow and S&P’s 5% gains so far in 2017 haven’t been too shabby, either.

And yet, despite the strong first quarter, the big blue-chip stocks of the Dow and the S&P have been adrift for the past month. The Russell 2000 small-cap index also has been treading water.

What’s going on?

First of all, stocks have come a long way in a short time: The Dow rallied 15% and the S&P 12% from Election Day through March 1st. And though sentiment has improved markedly, so far that hasn’t shown up in the hard data.

Job growth averaged 236-237,000 in January and February—pretty good, but almost exactly where it stood in the same period of 2015.

GDP rose 2.1% in the fourth quarter, a little better than previous estimates, but it increased only 1.6% for all of 2016. Getting from there to 3% growth after eight years of economic recovery is a very heavy lift. Getting to 4% growth—well, that’s only going to happen in Larry Kudlow’s wildest fantasies.

Second, the Trump agenda has stalled. A few weeks ago, investors started to doubt that Republicans and President Trump would be able to keep a key campaign promise by quickly repealing and replacing Obamacare. Last Friday, with the American Health Care Act in deep trouble among both moderate and conservative Republicans, Speaker Paul Ryan pulled the bill from the House floor.

So, now, a pillar of the Trump rally—that regulatory reform, big tax cuts and infrastructure spending would boost the economy and stocks—looks shaky. I don’t think investors can count on big tax reform or infrastructure projects getting through this fractious, dysfunctional Congress. That will ultimately disappoint the biggest cheerleaders for the Trump rally.

But FactSet Research, which tracks analysts’ earnings projections, estimates earnings growth for the first quarter was 9.1%. That would be the biggest growth in several quarters and would decisively put the “earnings recession” in the rear-view mirror.

So, if good earnings get stocks moving again, that could reassure investors that the “Trump rally” is about more than President Trump’s agenda and that fundamentals still count.