“Equities remain in a topping pattern near record highs…indicators have shown that the market is due for a small pullback…as we approach the inauguration…the risk of a larger pullback becomes greater,” said Randy Frederick, vice president of Trading and Derivatives at the Schwab Center for Financial Research.
While stock-market gains have leveled off, with the new administration getting down to brass tacks as early as Monday, the possibility of heightened market volatility increases, warned David Joy, Ameriprise Financial chief market strategist. That’s because what were previously opinions of private-citizen Trump now become policy expectations of the U.S. president. If Trump and his administration delay enacting those policies, odds of higher uncertainty become greater.
“What started out as the ‘Trump bump,’ which pushed stocks higher in the five weeks following the election, but has since turned into the Trump interregnum, will be tested to see if it has endurance,” Joy said.
It’s not just America’s biggest companies that stand to benefit from Trump’s fiscal-policy proposals. Smaller valued stocks in the Russell 2000 pay a 33% median corporate tax rate compared to 29% for the large cap S&P 500 companies, according to Burt White, chief investment officer for LPL Financial.
Small caps could stand to gain if a portion of manufacturing is brought back to the U.S. and a more favorable environment for mergers and acquisitions comes to pass under a relaxed regulatory environment.
“[Trump’s] social media campaign to discourage offshoring is likely to continue and generally hurt larger companies, potentially to the benefit of smaller U.S.-focused suppliers,” White said.
To that end, White pointed to the NFIB’s monthly Small Business Optimism Index, which jumped a record 7.4 points last month to a 12-year high. Other factors including rising interest rates, the strong dollar, and consumer spending levels, also stand to influence the stock market’s direction in the coming months.