Is The Trump Rally Over?

The big debate on Wall Street this week is whether the Trump rally is played out. From November 4th through Monday the 11th, the S&P 500 surged 5% and the Dow rallied 6%. Since then both indexes are down a bit. As Nelson Peltz, billionaire & famous investor, puts it, “Trees don’t grow to the sky.” Certainly we should expect some kind of pullback or correction at some point. We keep hearing that the stock market is fully valued or even overvalued. Peltz, for his part, says he doesn’t know whether that’s the case. His humility is striking, an admission that one can’t assume too much about the future.

Economist Ed Yardeni agrees, saying that while he’s been bullish this year, he was in hindsight not bullish enough. Remember, “we’ve had this terrible recession for the past three years that just didn’t happen.” He guesses that the current valuation of the stock market can be sustained as long as we don’t run into a recession. So while a correction may be in the offing, the longer-term trend is likely higher.

And at this point recession looks far, far off. Inflation edged higher last month as the economy maintained momentum. The Consumer Price Index (CPI) grew at an annual rate of 2.6% vs. 2.4% in the prior month. Core CPI—excluding more volatile categories like food & energy—held steady at a 3.3% annual rate. Gasoline prices are down 12% from year-ago levels, used cars are down 3.4%, appliances fell 2.3%, and apparel prices are flat. Food costs, which had been falling over the past year, picked up (groceries +1.1%). Services, however, continue to be a thorn in the side. Auto insurance prices are 14% higher than year-ago levels! Prices for lawncare, auto repair, drycleaning, haircuts, daycare, and sporting event tickets are up 4-6%. Ditto for municipal services like sewer, trash pick-up and electricity.

Certainly the Federal Reserve would like to see inflation continue to slow toward its 2% target. But that’s a tall order when unemployment is low, incomes are rising, and Americans are persistent spenders. This week we learned that real average weekly earnings grew 1.4% from a year ago. That means wages are rising 1.4 percentage points faster than inflation.

Speaking of faster, the Census Bureau far underestimated US retail sales in September. The initially reported monthly bump of .4% is now revised to .8% due to a surge in auto purchases. And October’s gain of .4% was slightly higher than economists’ anticipated. The year-over-year rate of growth on retail sales accelerated to 2.8% last month. People are spending.