In the weeks following Trump’s election, bullishness and investor optimism soared, pulling the market to unprecedented levels, breaking one record after the other in the process. Fast forward three months and you’ll find a completely different outlook brewing on Wall Street; and I’m not just relying on recent headlines to push me to this conclusion.
The weekly survey of retail investors by the AAII (American Association of Individual Investors), measuring bullishness in the marketplace, is now just above 30%, down from 46% at the start of 2017, while bearish investors have risen almost seven points since last week to over 37%. The indicator had reached its highest point in two years right after Donald Trump’s election. In addition, the most recent Investors Intelligence sentiment survey concurs with the data provided by the AAII showing that the percentage of self-identified bulls has fallen dramatically since recording a 30-year high in late February. Another piece of evidence that points to optimism faltering is the fact that short bets have been on the rise for the first time since November. While this is a common phenomenon during times of market weakness, high levels of short interest, especially on SPX, is never reassuring. While all these statistics are merely speculative, and in no way, shape, or form confirm a correction is due (there have been many false prophets, at various points of this bull market, to scream apocalypse), one cannot help but sense that the spirit of the financial world has shifted, thus ushering in yet another challenge for the Trump administration.
Speaking of Trump and his not-so-merry men, recent shenanigans coming from the Oval Office have not helped the shift in outlook mentioned above. While recent failures, such as his embarrassing health care reform defeat, certainly do not help mend the faltering faith of the American people in his administration, the most devastating facet, causing a downturn in bullishness and optimism, stems from Mr. Trump’s unwillingness and inability to rack up some easy wins.
What happened to the tax cuts? The repatriation of money stashed abroad? Infrastructure investment, anyone? With little to no action on these fronts (which, in theory, would be passable bills, ushering in not only a sense of security, but also unity within his own party), pre-inauguration Trump seems to have been full of hot air (even though this may not be the case), giving critics yet another reason to sling mud and worsen the wavering marketplace enthusiasm.
Finally, the most recent cause for concern, Boston Federal Reserve President Eric Rosengren and John Williams of San Francisco insisted that three additional rate hikes would be the most reasonable response to the strength of the American economy, clashing with Yellen’s initial intent of just two more interest rate hikes this year. Both representatives have been concerned with ‘overheating the economy’ and believe that an addition increase would provide additional protection.
As for the future, my own opinion is that, as the market continues to plateau as it has in recent weeks, there should be a growing sentiment of ‘quit while you’re ahead.’ A catalyst of any kind could spark a small selloff that should cause a correction of about 8-10% in the next month or two. While this prediction may be simplistic and general, it is the best one can do in this time of uncertainty. Whether I shall be proven correct will be determined by time and time alone.