Fed rate hike slows Dow’s march toward 20,000

Wright State University student Aziz Almuhanna studies for final exams outside of the Soin Trading Center in Rike Hall. The surge in stocks after the presidential election has yielded record highs on 15 trading days. TY GREENLEES / STAFF
Wright State University student Aziz Almuhanna studies for final exams outside of the Soin Trading Center in Rike Hall. The surge in stocks after the presidential election has yielded record highs on 15 trading days. TY GREENLEES / STAFF

Huge rally since Election Day has triggered talk of a ‘Trump bump.’

U.S. equities traded lower on Wednesday, cooling off a red-hot, post-election rally that propelled all three of the major stock market indices to close at record highs the day before.

Experts attributed the lull in trading to the Federal Reserve Bank’s decision on Wednesday to raise its benchmark rate for the first time since last December, which has historically depressed stock prices.

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The Dow Jones industrial average plunged 118.68 points, or 0.60 percent, to close at 19.792.53 — giving up all of its gains from Tuesday, which was the 16th record close for the Dow this year. Meanwhile, the Standard & Poor’s 500 index dropped 18.44 points, or 0.81 percent, to 2,253.28, while the Nasdaq composite fell 27.16 points, or 0.50 percent, to 5,436.67.

Wednesday’s pullback notwithstanding, U.S. stock markets have soared since Donald Trump’s surprise victory in the presidential election last month, leading some market watchers to refer to the resurgence in equities as a “Trump Rally” or the “Trump Bump.” Experts say the president-elect’s pro-business policies and infrastructure spending plans are driving recent gains.

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“The three campaign promises supporting the Trump Rally are no secret: a significant reduction in the corporate tax rate; repatriating U.S. profit abroad; and across-the-board deregulation,” said Rachel Wilson, assistant business professor at Wittenberg University. “The market has certainly proved that it responds to expectations ahead of true economic growth.”

However, there are reasons for caution in Trump’s rhetoric, Wilson said, including his anti-trade stance, which could curb economic growth.

“Foreign trade is an easy target, but you’d be hard-pressed to find many economists who support tariffs or quotas,” she said. “History has proved that a country’s economic growth is stifled when it engages with such measures.”

Still, the stock rebound reflects the conviction of many investors that Trump’s promises to increase government spending, cut taxes and ease financial regulations will outweigh his anti-trade talk, according to Bill Wood, a certified financial planner and a partner at The Advisory Group in Centerville.

Wood noted that stock market futures collapsed on Election Night when it became clear Trump would be the winner. The Dow careened more than 800 points in pre-market trading before stabilizing the next day near a record high.

RELATED: U.S. stocks near record highs after Trump election 

“The market was positioned for a Hillary (Clinton) win,” said Wood, who added that uncertainty surrounding a Trump presidency initially shook the financial markets. “For better or worse, Trump is in many respects still a very unknown entity. But the uncertainty is waning, and the market is beginning to zero in on how to adjust itself for a Trump economy, and we’re seeing the effects of that.”

Still, there are no guarantees that Trump can deliver on his campaign promises, leading some analysts to warn against making investment decisions based on Trump expectations before he even takes office.

“The election appears to have triggered a ‘hope’ rally in stocks,” reads a research note from James Investment Research in Xenia. “While hope is rising, concerns remain on when and what will get done in Washington. Too often, campaign promises are delayed, watered down or abandoned.”

Even if Trump can execute his plans, experts say corporations may decide to use their new windfall savings to buy back their own stock or raise dividends for investors, rather than use the money to simulate the economy or create jobs.

But such concerns have little impact on the Trump Rally in which the Dow has climbed more than 1,400 points since Election Day and is still within striking range of reaching 20,000 — just weeks after surpassing 19,000 for the first time.

The rally could continue for several months on expectations alone, according to Wood, who said there is plenty of fuel to fire the rally. Bearish institutional investors have built up high cash reserves that they may be ready to put to work in the stock markets, while retail investors continue to move aggressively into index funds, driving stock prices higher.

The momentum has already yielded double-digit percent gains in the share prices of several companies of local interest.

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West Chester-based AK Steel Holding Corp. has seen its stock price skyrocket more than 66 percent since Election Day, from a close of $6.07 on Nov. 8 to $10.39 on Wednesday. AK Steel is one of a number of industry stocks that have benefited from the president-elect’s outlook on infrastructure spending.

Meanwhile, Trump’s momentum has reinvigorated shares of Cincinnati-based Kroger, which had been in a free-fall prior to the election because of falling food prices. But many investors believe Trump’s election will usher in a new era of inflation and higher food prices, which has already helped boost Kroger’s share price more than 10 percent from $30.90 on Nov. 8 to a close of $34.72 on Wednesday.

But roadblocks may be ahead for both the economy and the stock market, experts say.

The Fed’s decision Wednesday was only the first steps in a series of rate-hikes planned next year that could raise interest rates significantly higher and have a cumulative effect on the economy and investors, Wittenberg’s Wilson said.

“We are in uncharted territories with rates at near zero,” she said. “I expect the Fed to raise rates gradually, but as I stated earlier, markets respond to expectations, too. If they expect a sustained rise in interest rates, we could see brakes on the Trump Rally.”