Having only broken the 20,000 point barrier three weeks ago after almost two months of trying , the Dow Jones is already over halfway towards 21k in the latest in a string of stock market rallies since Donald Trump was elected as US President. Not only is the Dow soaring, but the S&P 500, Nasdaq and Russell 2000 indices have also posted fresh all-time closing highs on both Monday and Tuesday of this week.

This rally is still attributable to the factor that helped to launch the initial post-election rally back in November – the potential for attractive pro-business policies enacted by the Trump administration that benefit US stocks. These include (but are not limited to) the potential repealing of the Dodd-Frank act, which currently limits the risk financial companies are allowed to take, a vast $1 trillion infrastructure spending plan (although this has yet to be confirmed in full) and a reform of the tax system (presumably focusing on the corporate tax rate but possibly also aimed at individuals).

The promised ‘phenomenal’ tax system reform by Donald Trump made on Friday in a meeting with airline executives is seen as the foremost catalyst for the most recent rally in US equity markets, which has been highlighted by the rally of the Russell 2000. The small-cap index had been lagging it’s larger counterparts after the November election after rallying significantly in reaction to Trump’s victory. The lack of a concise plan on tax had been weighing on stocks until Friday’s announcement.

However now, small and medium business owners are confident that a lowering of the corporate tax rate – the objective that Trump’s tax reform will presumably be looking to achieve – will help profitability for thousands of US businesses when the reform is officially announced.

This week’s more hawkish Federal Reserve alongside the potential for policy change is also helping to drive the financial sector. Having only hiked rates for the second time in a decade in December, the central bank is forecasting three more this year, with Fed Chair Janet Yellen yesterday refusing to rule out the possibility of a hike being made at the 15 March meeting.

This has led to notable outperformance from the financial sector in the latest Wall Street rally, including Goldman Sachs, which after contributing a third of all gains for the blue chip index on its march towards 20,000 points, closed at its highest ever level yesterday, topping its previous best mark reached before the 2008 financial crisis in October 2007.

However, the problem with the latest rally is that once again, bullish sentiment is based on promises without the action to base it upon (so far). There is still a chance that Trump’s tax reform – scheduled to be announced within 2-3 weeks – won’t make businesses as profitable as is expected. Likewise, he may be unsuccessful in repealing the Dodd-Frank act, damaging the heavily weighted Financials, or the Federal Reserve might not hike interest rates as many times as forecast, as was the case in 2016 (four rates were forecasts, only one was delivered).

As a result, it is impossible to accurately forecast how long the latest rally might last. The longevity of the rally could be impacted should the administration fail to follow through on a promise, while some fresh controversy surround Trump and his aides could halt the rally in its tracks.

For now though, Wall Street is happy to rally on the belief that the 45th President of the US could usher in a new age of profitability for US companies both big and small. Rally first, ask questions later.

Henry Croft, Research Analyst, 15 February 2017