White House

The 'Teflon market': Why stocks keep setting new highs despite Trump drama

Advisor advice to President Donald Trump

After all the Michael Flynn scandals and overturned executive orders and middle-of-the-night disruptive tweets, Wall Street believes one thing above all — that the Trump administration will survive and the U.S. economy will thrive.

There's pretty much no other way to account for the way financial markets have managed to ignore the tumult in Washington and continue to reach new record highs.

"This indeed is the Teflon market," David Rosenberg, senior economist and strategist at Gluskin Sheff, said in a daily market note this week. "Even investors who were screaming to sell the market if Trump got elected just ahead of last November's vote have become some of the most vocal cheerleaders."

The lead-up to President Donald Trump's improbable victory did feature a parade of Wall Street experts who believed the economy would slump toward recession and the equity bull market would come to a screeching halt should the billionaire businessman prove victorious.

Those voices are largely silent now, though some warn that Trump's loose lips may yet sink Wall Street's ship.

However, the stock market has followed a nearly straight line higher since the election, with the S&P 500 gaining 9.8 percent.

Investors are a little bit numb to the tweets and static coming out of Washington and are focusing on the real economic numbers.
Paul Zemsky
chief investment officer, Voya Investment Management

The latest leg of the rally has come even as the White House appears in disarray, particularly since the forced resignation of National Security Advisor Michael Flynn. New revelations are coming out continually of the Trump team's ties to Russia, he lost the first round of what likely will be a protracted battle over the immigration halt he placed on seven Muslim-majority countries and polls show his approval rating among the lowest for new presidents.

Investors don't seem to mind — sentiment surveys are soaring and money is pouring into equities. The optimism comes from the belief that despite the political sideshow, the economy is only beginning to gather steam after the postcrisis slog upward during former President Barack Obama's term.

"At this point investors don't believe it's going to be disruptive for the overall economy. There's a lot of noise coming out of Washington, and the issue with Flynn is potentially serious," Paul Zemsky, chief investment officer at Voya Investment Management, said of the political tumult.

Traders celebrate on the main trading floor of the New York Stock Exchange as the Dow Jones industrial average passes the 20,000 mark shortly after the opening of the trading session in New York, January 25, 2017.
Brendan McDermid | Reuters

"But investors are a little bit numb to the tweets and static coming out of Washington and are focusing on the real economic numbers, which are probably more accurate than all of the noise and all of the partisan positioning," he said.

Those numbers began turning better toward the latter part of 2016. But the postelection climate has seen an even bigger boost concerning sentiment, with everyone from professional investors to small business owners expressing hopes that the market rally will continue and growth will accelerate.

Those trends have had to do battle with a near-daily barrage of some disturbance or another coming from Washington. So far, though, the optimists are winning.

"Those are political risks to the administration that could have implications for the market if it would affect the operation of the administration," said John Stoltzfus, chief market strategist at Oppenheimer. "That's a legitimate risk, but that will probably be managed in some manner, or explained, or Lord knows what."

Investors are focusing on issues that have direct impact, like Trump's moves to renegotiate international trade agreements, Stoltzfus added.

"We've arrived at a point where we have some serious problems [with trade], and I think there's a need to negotiate, and I think the market picks up on all that stuff," he said.

No room on the short side

To be sure, investors have shown some impatience with Trump.

Whenever he's veered off message about taxes, regulations and fiscal stimulus, the market has paused or retreated. Issues like immigration restrictions aren't market friendly, and Trump's seemingly daily Twitter wars are always a danger, particularly to the shares of individual companies that come into his crosshairs.

But the market has shown repeatedly that all the momentum is to the upside. Investors looking to sell or sit out the rally do so at their own peril.

"I hear lots of skepticism about the 2017 'Trump rally.' Valuations are stretched. U.S. equity markets are putting too much faith in an as-yet-unproven presidential administration. Stocks are whistling past the proverbial graveyard," Nick Colas, chief market strategist at Convergex, said in a note.

"For the trader — someone interested in catching short-term moves in equity prices — none of this matters because their only choices are to participate or sit this one out," he added. "Realistically, that second option is barely a possibility. When there is money to be made on the long side, it takes a herculean level of willpower to stay on the sidelines."

The market may be priced for perfection, Colas said, but conditions needed to sustain the rally remain well in place.

"If you disagree with the underpinnings of the rally, that's fine. Pick your objections, find the catalysts that will make the market see things your way, and then wait," he said. "Your time will come. It just isn't tomorrow."