While Donald Trump may be making news around the world the US stock market has certainly taken him to heart as markets push to record highs. At this moment in time there is no stopping the momentum behind stock markets and many bears are now running for the hills desperately trying to reduce their downside exposure. As the bears run for the hills this could give stock markets yet another boost!
Closing short positions
As US stock markets continued to push towards record highs many investors took a bearish position using a mixture of stocks and derivatives. They saw the Trump led rally as a short-term trend which would very quickly turn downwards as his presidency got off to a rocky start. At this moment in time there is no sign of investors selling down US stock markets instead they seem to be banking on economic growth in the short to medium term due to expected increased investment in infrastructure and public spending.
Interestingly, as markets push further and further ahead those holding short positions will be under greater pressure to close these which will effectively give markets an extra boost.
Out of the market is dangerous
While they do not necessarily get the air time that more positive analysts receive at the moment there have been a number of bearish analysts over the last few months. The problem is that advising clients to remain out of the market, because they expected a sell-off, does not go down well when markets are pushing further ahead. Investors feel they are missing out and analysts are starting to crack and change their bearish positions to more positive ones. So, this could effectively see a flurry of new investors, frightened of being out of the market, creating a self-fulfilling prophecy and pushing the markets higher.
We have seen this “out of the market” phenomenon on many occasions in the past with bears trying to hold their position until it no longer becomes tenable. Justifying an out of market position when markets are flying high is difficult but even more challenging when the rally shows no signs of abating.
How long will the rally last?
It is impossible to say how long the current rally in US stock markets will last because on one hand we have expectations of improved economic growth in the short to medium term as well as a significant increase in infrastructure spending. The increase in infrastructure spending alone will create more employment opportunities and help to expand the economy in the short to medium term. This issue is often underestimated by investors but the figures that Donald Trump is talking about will make a significant difference if he actually delivers.
The only downside to this situation is that as everybody becomes positive about the US stock market, history shows us this can often be the time to start reducing your exposure. Expectations become over stretched, valuations take a lot of growth for granted and there is little room for error. However, it would take a brave person to call the top of this current US stock market rally.