In the aftermath of the presidential election last year, traders on Wall Street sent the Dow Jones Industrial Average up to new all-time highs in the hope that the Trump administration would be able to do the following:
- Scale back, or fully repeal, the Dodd-Frank Wall Street Reform and Consumer Protection Act
- Boost inflation expectations
- Lower corporate tax rates
However, with the discord and upheaval in Washington D.C., many traders are wondering what’s left of the initial Trump trade? After all, the Dow Jones is once again at a new all-time high.
Scaling Back, or Repealing, Dodd-Frank
While the Dodd-Frank Act was considered by many to be a huge win for consumers, it was received with much less enthusiasm by bank executives and investors.
The act not only saddled financial institutions with additional layers of restrictions and red tape that required hiring teams of attorneys and compliance professionals to sort through, but also — via the Volcker Rule — prohibited financial institutions from engaging in proprietary trading.
This is one area where the Trump administration has had some success. Republicans in Congress have been working aggressively to roll back restrictions that were put in place by Dodd-Frank.
In early June, Republicans in the House voted to pass the Financial Choice Act, which looks to dismantle many aspects of Dodd-Frank. Now it is in the hands of the Senate.
Boosting Inflation Expectations
Many of the economic policies President Trump proposed on the campaign trail received a lot of attention for their potential to boost inflation in the United States. Much of the increase in inflation expectations stemmed from the increased economic growth analysts were hoping for, but some of it stemmed from concerns over the trade battles the administration may engage in.
Restructuring trade agreements and/or imposing tariffs on foreign-produced goods (especially those from China) would likely have pushed prices higher in the United States. This, however, has yet to materialize.
Rising inflation expectations initially pushed bond yields higher to compensate bond investors for the increased inflation risks they were facing at the beginning of 2017. Since that time, bond yields have dropped back down as inflation rates have fallen below the Federal Reserve’s 2% target rate.
Lowering Corporate Taxes
After the failure in the Senate to pass health care reform, lowering corporate taxes may be the Trump administration’s last chance to get its agenda back on track. Investors love the idea of lower corporate taxes because the lower corporate taxes are, the more money companies can return to their shareholders.
This may be a big lift in the current cantankerous environment in Washington D.C. We’re starting to see some talk of potential bipartisan solutions for tax reform, but, at this point, the two camps seem less interested in compromise and more interested in staking out their ideological ground.
The Bottom Line
The Trump administration still has the potential to provide an additional boost to the U.S. stock market, but traders — thanks to the continued chaos that seems to perpetually swirl around the White House — are not nearly as optimistic as they once were that the promised stimulus is going to materialize.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
Most recently, John and Wade are co-options strategists of Turbo Trader Live — a live, interactive trading room service that runs two hours every trading day the market is open. Turbo Trader Live focuses on long call and put options, as well as long and short vertical spread strategies. Find out how to get in on the live trading action and start making real profits by clicking here.