Who’s in Charge of This Market, Anyway?


Up one day, down the next, then up again, then down. That’s how stocks have been behaving lately.

And don’t blame the usual suspects. The Federal Reserve is on a clear course to gradually—the word Fed Chair Janet Yellen has been using for the last couple of years—raise interest rates, which remain historically low.

The big question hanging over the Fed, of course, is how to shrink its $4.5-trillion balance sheet, which it built through massive bond buying after the financial crisis. But the central bank is likely to be even more cautious with that.

The second big pillar of stock performance—earnings—have been doing just fine. Sheraz Mian of Zacks wrote that as of Wednesday first-quarter earnings are ahead of expectations, as 75% of companies in the Standard & Poor’s 500 index reporting thus far have beaten earnings estimates and 54% have topped sales expectations.  Mian expects earnings for S&P 500 companies to be up 8.6% over last year. That’s the best quarterly performance in quite a while.

So, with the Fed moving slowly and earnings rising strongly, stocks should be advancing, right?

But they’re not, so we need to look at the un-usual suspects.

Over the last few weeks, I’ve frequently written about the end of the “Trump bump,” as Wall Street’s early euphoria fades and the prospects for big tax cuts and infrastructure spending—the basis of the “reflation trade”—become much more remote.

Apparently wheeling and dealing in Washington, D.C.  isn’t as easy as our neophyte president thought. Now, a bitterly divided Republican Congress is trying again to repeal and replace Obamacare in time for President Trump’s first 100 days, but its chance for passage through both houses of Congress is remote. That makes tax reform much less likely, especially given the number of entrenched special interests that have huge stakes in preserving their own exemptions and carve-outs.

So, investors are no longer counting on a big boost to the economy from tax cuts and infrastructure building. And without those fiscal boosts, the economy isn.’t looking too great, either

As I wrote here last week and in my MarketWatch column Wednesday, a lot of the economic data is pretty weak—retail sales, especially auto, housing starts, first-quarter GDP, and inflation all have been disappointing.

That’s what happens after economic recoveries go on for eight years, but it flies in the face of the hope generated by the Trump presidency and the strong earnings and sales growth Zacks cited.

How will it be resolved? We’ll see. But it’s clear neither the Fed nor the president is in charge of this market. We’ll soon find out how capable it is of standing on its own two feet.



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