Thursday February 9th, 2017, will go down in the history books as the day in which the Dow Jones soared to a new record. The index closed at 20,169.42 for the first time in history, and continued rallying towards new highs on Friday. The S&P 500, NASDAQ and the TSX in Toronto, followed suit and rallied behind the Dow Jones. Analysts are still trying to come to an agreement as to what is driving the Bull Run in the markets, but haven’t gotten their stories straight yet.
As the Dow Jones Rises, the US Dollar Weakens
Many would point to the expected fiscal stimulus for infrastructure expenditure that President Trump promised. This however, might be misleading. The US Dollar is the key indicator that fiscal stimulus might not be the driver behind the Bull Run in the markets. While the Dow Jones has been looking for new highs, the US Dollar has weakened. The USD:CAD pair over the last month shows this change clearly.
Fiscal Stimulus Strengthens
Decoupling between the Dow Jones and other indices on one hand, and the US Dollar on the other hand, shows clearly that expected fiscal stimulus is not being priced into the market. Fiscal stimulus causes currencies to appreciate because the government increases demand for local currency to pay for the projects. Usually that also drives the stock market because fiscal stimulus also serves to increase demand for goods and services, thus contributing to an increase in profits for various industries. This means that the so called ‘Trump Rally’ is not due to any fiscal stimulus expectations.
The Trump Administration Has Influence
Nevertheless, the Trump administration might still have some positive influence over the markets. It is possible that the promise to dismantle Dodd-Frank, reduce taxes and do away with other kinds of regulation, might be the driver behind those market rallies. If this is the case, and fiscal stimulus comes at any given point in the future, then the Dow Jones will certainly continue to break new records in the next few months, while the US Dollar halts its decline and starts strengthening again. In the meantime, analysts will have a tough time figuring out the exact reason why bullish sentiment has taken over the markets, and why is it spilling over to other markets – like the TSX – given that the current administration has an anti-trade attitude.