Optimistic About the Economy, Confused About the Stock Market? You're Not Alone.
Here's what to make of a nervous market that failed to celebrate a new all-time high for the S&P 500 — and how that lack of excitement is actually helping it stay elevated.
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Typically, the mood is bullish and optimistic when the S&P 500 is hitting a new all-time high. That is not the case this time. There is a high level of negativity and much skepticism. However, there is also a high level of optimism about the economy and Trump's policies.
In addition to the confusing sentiment, there are also strong signs of rotational action. Money is moving out of growth stocks and the Magnificent Seven and into value names and other groups that have been lagging for a very long time.
The confused sentiment is due in large part to uncertainty about President Trump's policies. There has never been an administration that has moved so quickly to make changes. Not only is it difficult to figure out the impact of the changes that are being made, but Trump is also still developing his policies on tariffs, taxes, foreign affairs, and many other areas. The market has been totally wrong about what Trump would do with tariff policies, and that has been one reason it has stayed strong.
While there is general optimism about the economy, there is quite a bit of nervousness about increased inflationary pressures. While DOGE is pushing hard to cut spending, there is also tremendous pressure to cut taxes as well. The hope is that strong economic growth will help to absorb the inflationary impact of lower taxes.
It is a very confusing market environment. One of the ironies, however, is that the lack of excitement about new all-time highs for the S&P 500 is helping the market stay elevated. There is worry that the much-anticipated market correction is not going to hit, and market players don't want to be left on the sidelines if Trumpian economic policies do produce the Golden Age that is promised.
One way that market players are dealing with concern about valuations and extended conditions is that they are rotating out of big growth stock winners and into names that are seen as better values. Since January 1, the Russell 1000 Value ETF IWD has been up about 6%, while the Russell 1000 Growth ETF IWF has been up 3.7%.
The rotational action is choppy and inconsistent, making trading difficult, but it benefits from skepticism about the all-time highs for the S&P 500.
My best advice continues to be to focus primarily on stock picking rather than trying to time the direction of the indexes. While macro matters are very uncertain, the price action of individual stocks is much easier to manage.
We have a little early softness on Thursday morning.
At the time of publication, Rev Shark had no positions in any securities mentioned.
