The Dow, S&P 500, Nasdaq and Russell 2000 all hit record highs on Monday.
Investors, giddy with excitement, clearly believe that both the big blue-chip multinationals and the smaller companies that do most of their business in the United States will continue to thrive.
So is this a Donald Trump rally? Or a Janet Yellen rally?
Some strategists blame Trump’s stimulus plan and talk of removing many burdensome regulations as the reason for the stock market’s surge.
Or maybe this is better described as a continuation of the Barack Obama rallies?
You could argue that POTUS 44 has dealt a good hand to POTUS 45.
The solid job market and overall economy that Trump inherited may be why consumers and businesses are so confident.
But investors (and financial journalists) are usually quick to give the president more credit and blame than they deserve for the stock market’s performance.
RBC strategist Jonathan Golub made that point in a Monday report aptly titled: “Message to the Market: It’s Not Just About Donald.”
Related: Trump isn’t killing the bull market
Golub noted that the S&P 500 rose nearly 7% from the end of June to Election Day — when most polls predicted Hillary Clinton would be the next president.
But stocks have continued to rise since then, gaining another 8% since Trump’s troubling (at least to the mainstream media and Wall Street) victory.
You can’t have it both ways. It is illogical to say that the stock market rose because investors believed Trump would lose, and that the stock market continued to rise because Trump did not lose.
Bond yields have also been rising since Trump’s victory, a phenomenon many investors attribute to possible stimulus from the president and a Republican Congress.
Golub noted, however, that the yield on the 10-year U.S. Treasury note was also rising in late summer.
Of course, many investors are also looking forward to Clinton’s stimulus.
Yet once again, many investors are claiming that Trump is the catalyst for something that not only was going on before he was elected, but was happening because many thought he would lose.
Related: Stocks avoid 1% dive for unusually long stretch
So it’s odd that Trump is seen as the main reason for the market rally that started months before anyone thought he might win.
What is going on? The one constant over the past few months has been the Fed.
Yes. Markets are reacting to Washington. But they’re watching Janet Yellen more closely than the White House.
The Fed made it clear ahead of the election that it was likely to raise rates in December and a few more times in 2017, no matter who wins the presidential race.
The good news for investors is that the U.S. economy appears to be growing steadily, but does not appear to be at risk of overheating.
Related: Here’s why the world’s biggest fund manager is worried
The most recent employment report shows wages rising at a respectable 2.5% annual rate. But that wasn’t enough to spark fears of runaway inflation and lead the Fed to sharply raise interest rates.
Even if Yellen and the Federal Reserve raise interest rates 3 times this year, each hike is likely to be only 25 basis points. That would push the Fed’s key short-term rate to a range of 1.25% to 1.5%.
This is still very low. At these levels, stocks will still be more attractive than bonds. Corporate earnings should be able to maintain healthy growth. Consumers are likely to keep spending.
Therefore, investors should pay close attention to Yellen, not just short-sighted the president,
With that in mind, Yellen will testify before Congress on Tuesday and Wednesday. What she said about the timing and magnitude of future rate hikes could end up keeping the rally on full steam — or preventing it from stalling.
CNNMoney (New York) First posted on February 13, 2017: 12:30pm EST