The U.S. stock market has seemed stuck in the mud lately, after failing during recent trading sessions to surpass a big psychological milestone – Dow 20,000.
A flat market is one thing. The real question is whether conditions are in place for a correction in U.S. equities sometime this year.
Several articles in the financial press have made the case that optimism tied to the “pro-growth” policies of the incoming Trump administration and a Republican Congress may have gotten out of hand.
A recent Bloomberg article points out that a number of Wall Street firms don’t quite see the justification for much of the money that has poured into stocks and stock funds since Election Day.
The article quotes recent research by Bank of America Merrill Lynch suggesting that U.S. equity bullishness and emerging-markets and bond bearishness “is now vulnerable to a reversal.”
Moreover, Morgan Stanley and Goldman Sachs Group Inc. sent out warning to investors last week, calling for U.S. equities to perform well in the first half of the year, but see a move lower thereafter.
Morgan Stanley’s chief equity strategist Adam Parker wrote a piece suggesting that positive impacts from Trump’s proposals, such as lower taxes and less regulation, have already been priced into the markets.
“[W]hat incrementally positive and exciting outcomes could be produced in the first few weeks after [the inauguration]?” he asks.
And Goldman Sachs, in a report, argued that a rotation should play out later this year from the S&P 500 to emerging markets – specially emerging markets outside of China.
And strategists at Deutsche Bank draw attention to a combination of technical and fundamental forces that suggest the developed-market equity rally may look “stretched.”
Meanwhile, a piece on the Forbes website states four reasons why the “Trump rally has no legs.”

Written by Jake Weber, a senior Investment specialist for Garret/Galland Research, the piece argues that the market could be overplaying the positives – such as lower taxes, deregulation and fiscal stimulus – and underplaying the negatives , such as soaring deficits and even a possible trade war.
After eight years and 100,000 pages of new regulations during the Obama administration, it’s not surprising why the markets are cheering for change,” writes Weber. “There are reasons to be optimistic. But as an investor, I’m not ready to give Trump the Nobel Prize for Economics just yet.”
Weber writes about the so-called mountain of debt that confronts a new administration that seeks to spend close to a trillion dollars on additional infrastructure spending without having the tax revenues to cover that expense.
“Federal debt is already $20 trillion—excluding the massive unfunded entitlement obligations that will balloon over the next decade as more Baby Boomers reach retirement age,” he writes.
Weber writes that if “Trump can quickly push through his economic agenda and cooler heads prevail on the trade front,” then the path of least resistance will be higher for interest rates.
“In this optimistic view, strong economic growth could overcome the headwinds from the debt overhang. The Fed would still probably err on the side of caution,” he writes, adding that allowing inflation to run ahead of 2% would help relinquish some of the national debt burden.
“However, it’s more likely that Trump’s agenda faces pushback from both sides of the aisle. If the last eight years have taught us anything, it’s that there are many creative ways to hold up action in DC,” he concludes. “In that case, the stock market rally and the bond market rout have both probably overshot.”
I’ll close this column with a reference to a piece by Washington Post veteran columnist Robert Samuelson on the question of President-elect Donald Trump’s “jawboning” approach to dealing with U.S. companies.
“First, [Trump] pressured Carrier, a maker of heating and air-conditioning units, not to move some work to Mexico, saving 800 to 1,000 jobs (various figures have been published),” writes Samuelson.
“Next, he pushed Ford not to build a new $1.6 billion assembly plant in Mexico; this purportedly saves 700 American jobs. More recently, he’s made nasty noises about General Motors’ and Toyota ’s Mexican operations.
“All this may be good politics - but it’s not good economics,” Samuelson asserts. “ The reality is that his jawboning won’t create many new jobs and could actually lose U.S. jobs if American vehicle producers are saddled with uncompetitive costs. History suggests that Trump’s high-profile arm-twisting will disappoint.”
To make his case, Samuel looks at the effort of then-President Lyndon Johnson in the 1960s to use the bully pulpit of the presidency to force U.S. corporations to keep prices artificially low.
Johnson’s “frantic efforts to contain inflation by jawboning make Trump look like a piker,” adds Samuelson. “When Bethlehem Steel, a major producer, broke its pledge not to boost prices, Johnson denounced the firm’s executives as unpatriotic and forced them to back down.

When aluminum companies raised prices, he released supplies from government stockpiles to undo the increase. It worked. Johnson’s interventions were many and varied.
But according to Samuelson, Johnson’s efforts to keep prices under control failed.

“Inflationary pressures - reflecting cheap credit and Vietnam War spending - overwhelmed the jawboning. Wages and prices were bid up. By 1969, consumer price inflation was 6 percent, up from just above 1 percent in 1960. The ‘70s were spent trying to contain inflation, which reached an annual peak of 13 percent in 1979 and 1980.”
The lesson of LBJ’s jawboning is that the government can’t easily offset the economy’s powerful, underlying forces,” the column concludes. “Manufacturing employment will probably never again reach its level before the Great Recession, but the main reason isn’t imports or factories’ flight abroad – it’s automation.
And no amount of jawboning will stop the relentless rise of the robots.