Fading Optimism on Wall Street

Summary

---

WSJ Your Money Briefing: "Fading Optimism on Wall Street"

Date: August 22, 2017
Host: Charlie Turner
Guest: Michael Wursthorn, Wall Street Journal reporter

---

Episode Overview

This episode dives into the noticeable cooling of investor enthusiasm on Wall Street after a lengthy market rally driven by post-election optimism. Host Charlie Turner and WSJ reporter Michael Wursthorn discuss whether the so-called "Trump rally" is losing steam, what’s behind recent market pullbacks, and what investors are watching as uncertainties mount regarding the Trump administration’s agenda, corporate earnings, and moves by the Federal Reserve.

---

Key Discussion Points & Insights

1. Waning Optimism and the Bull Market’s Status

• Market Performance:
  • U.S. stocks have ended lower for two consecutive weeks, each including a significant sell-off, indicating a dip in investor optimism.

    "The pullbacks are a sign that investor optimism is flagging." – Charlie Turner [00:40]

• Investor Sentiment:
  • There’s a noticeable shift in investor mood, with uncertainty about the sustainability of the bull market as doubts grow over the administration’s ability to push through market-friendly policies.

    "We're facing a period where there's waning enthusiasm for the first time during this eight month presidency..." – Michael Wursthorn [01:13]

2. Post-Election Rally and Its Engines

• Earnings as a Driver:
  • Strong corporate earnings, both domestic and international, were a key reason for gains earlier in the year, but expectations are moderating.

    "A lot of folks have pointed to a lot of the gains this year to the incredible earnings of US Companies..." – Michael Wursthorn [02:03]

• Shift in Focus:
  • As the earnings season wraps up, investors are left to navigate growing political uncertainties and diminishing expectations for further earnings outperformance in the year’s second half.

3. Impact of Political and Legislative Uncertainty

• Trump Agenda in Doubt:
  • Key elements of the administration's agenda, particularly tax reform, seem less likely to be enacted soon, prompting investor worries.

    "Tax reform is probably one of the biggest pieces of that overall... you saw a lot of stocks, especially those in the financial sector, pick up massive gains..." – Michael Wursthorn [03:08]

• Additional Hurdles:
  • Upcoming debt ceiling negotiations and general distractions in Washington amplify the sense of uncertainty.

    "There's going to be a number of distractions that really then weigh on the administration..." – Michael Wursthorn [03:27]

4. The Federal Reserve’s Next Moves

• Anticipating Fed Actions:
  • The Fed is expected to unwind its balance sheet, with a possible interest rate hike by year’s end, although there’s unease about the speed of these moves.

    "It seems like the Fed's still going to be moving forward with unwinding its balance sheet... If the Fed moves way too fast... you're going to see a sharp pullback in stocks." – Michael Wursthorn [04:06]

• Investor Preparedness:
  • Most investors feel they have a general sense of the Fed’s plans, but are wary about the impact of rapid policy shifts.

5. Sector Performance: Early Signs and Canary Sectors

• Small Cap & Transportation Stocks:
  • Small cap stocks and transportation sectors, which surged after the election, have pulled back noticeably—potentially an early indicator of slowing economic growth.

    "Starting this summer... the Russell 2000 has given up a lot of those gains so far this year. And you're also seeing transportation stocks within The S&P 500 pulled back quite a bit so far this summer." – Michael Wursthorn [05:13]

  • These sectors are particularly watched for signs of broader economic strength or weakness.

    "If you're seeing a pullback amongst Russell 2000 companies as well as transportation stocks, that could be an indicator that the economy is moving into a slowdown..." – Michael Wursthorn [05:32]

6. Short-Term Uncertainty and Longer-Term Challenges

• Market Volatility:
  • The current market environment is unpredictable, and sentiment could shift rapidly depending on new developments.

    "We could be sitting here next week or three weeks from now or a month and something will have happened to reverse course and the outlook becomes sunny again." – Charlie Turner [06:01]

• Looking Ahead:
  • While many strategists expect the year to end positively, sustaining the rally into next year looks challenging as corporate earnings growth is likely to slow.

    "Next year is looking harder and harder to figure out if we can really continue this market...corporate earnings growth is going to just become harder and harder..." – Michael Wursthorn [06:30]

---

Notable Quotes & Memorable Moments

• On Market Mood:

  "We're facing a period where there's waning enthusiasm for the first time during this eight month presidency..." – Michael Wursthorn [01:13]

• On Political Risk:

  "As the reality has set in... and tax reform looks harder and harder to certainly pull off this year, you're starting to see investors grow more concerned..." – Michael Wursthorn [03:18]

• Federal Reserve Jitters:

  "There's a lot of concern if the Fed moves way too fast on some of this stuff that you're going to see a sharp pullback in stocks." – Michael Wursthorn [04:22]

• Market’s Unpredictability:

  "That is one of the more frustrating things for I think a lot of people in the market right now is that there are just so many factors that are weighing on this bull market at this point." – Michael Wursthorn [06:11]

---

Timestamps for Important Segments

• Introduction & Market Pullbacks: 00:38–01:13
• Drivers of Gains, Fading Earnings Outlook: 01:53–02:50
• Political Uncertainty & Tax Reform Prospects: 02:50–03:51
• Federal Reserve Discussion: 03:51–04:54
• Sector Performance & Warning Signs: 05:10–06:01
• Market Uncertainty & Outlook for Year-End and Beyond: 06:01–06:58

---

Summary

This episode paints a cautious but not yet bearish portrait of Wall Street’s current mood. While the bull market’s demise is not imminent, growing doubts about political progress in Washington, softer corporate earnings outlooks, and uncertainty about the Federal Reserve’s timing have all converged to dampen the optimism that defined markets after the 2016 election. Investors are advised to brace for further volatility and to be attuned to signals from small cap and transportation stocks, as well as monetary policy shifts, as they navigate the market’s next phase.

Transcript

[Deel Representative]

Still running global payroll like a relay race. Deal replaces fragmented payroll vendors with one global system. No third parties hire, manage and pay teams in 150 plus countries with in house local experts and white glove delivery and deal plugs into what you already use. Workday SAP Netsuite operate like a local everywhere. Visit d e l.com WSJ that's d e e l.com WSJ.

[Michael Wursthorn]

This is yous Money Matters from the Wall Street Journal.

[Charlie Turner]

Welcome to YOUR Money Matters. I'm Charlie Turner in New York. US Stocks have now finished lower for two consecutive weeks. Each week included one session with a big sell off. The pullbacks are a sign that investor optimism is flagging. The Wall Street Journal says that while it's too early to call an end to the eight year bull market, the the optimism that defined the post election rally is evaporating. Here to talk about this is Wall Street Journal reporter Michael Wursthorn. So Michael, are we finally at the stage where the Trump rally has run out of gas?

[Michael Wursthorn]

Well, so investors are a little split on whether or not this might be the end of the rally. But there's one thing for certain across the opinions of investors, strategists, analysts and others and that's that we're facing a period where there's waning enthusiasm for the first time during this eight month presidency so far as investors at a number of obstacles that's facing this administration that's facing a lot of his agenda, including tax reform and how that's going to get done. And it's starting to show up in these results and we're seeing it perhaps a little more magnified as a lot of the bigger traders go on vacation, take some time off and that leaves a lot of retail money left. Sort of trying to make sense of what this news might be.

[Charlie Turner]

Are there just no longer any reasons or any real reasons to buy stocks? Since the post election exuberance has gone and also the earnings season has pretty much gone as well.

[Michael Wursthorn]

Yeah, a lot of folks have pointed to a lot of the gains this year to the incredible earnings of US Companies as well as those abroad. We just finished a great earnings session. There were some mixed results toward the end around some retailers, but overall it was a great earnings season. As we enter into the second half of the year, those forecasts for earnings are not going to be as strong. And that's another thing that investors are going to have to take into account as they're trying to figure out what to do with their money and how to play this market going to have the continued uncertainty in Washington, a number of obstacles looming that's just for the Trump administration and Congress to deal with. And on top of that, corporate earnings in the third quarter are not going to be as phenomenal as they were in the second. So we could certainly be looking at something that's a little more tepid for investors.

[Charlie Turner]

Have investors become pessimistic at this point that President Trump can enact any part of his legislative agenda? There seem to be too many distractions. The thing is, investors and other people have been counting on this agenda to be enacted to boost the economy and corporate earnings.

[Michael Wursthorn]

Yeah. And tax reform is probably one of the biggest pieces of that overall. We saw, you know, certainly after the election and earlier in President Trump's tenure when it was looking a little bit better for tax reform, you saw a lot of stocks, especially those in the financial sector, pick up massive gains. As the reality has set in as we moved along. And tax reform looks harder and harder to certainly pull off this year. You're starting to see investors grow more concerned as to whether or not this agenda is really going to be able to get done. And there's going to be a number of distractions that really then weigh on the administration that's further going to just make any movement on tax reform harder. Among those is certainly the debt ceiling battle that's going to start in October, and of course, what the Fed's going to do, and that's just going to just make it a lot more wary for investors.

[Charlie Turner]

What do you think the Fed is going to do, and what does that signify? There have been forecasts that the Fed will raise interest rates one more time this year, but the economy is not really kicking into high gear at this point. Do you think they may adjust their forecast or just change their minds?

[Michael Wursthorn]

It seems like the Fed's still going to be moving forward with unwinding its balance sheet, and there's no surprises there. Interest rates. It seems like there could still be a rate increase by December, although there still seems to be some mixed feelings as to whether or not that could happen. I would say investors across the board are fairly confident they know how the Fed's going to proceed, that there will be some unwinding of that balance sheet, but pulling back off that period of quantitative easing, and then interest rates are going to have to go up at some point. The big concern, though, for a lot of investors is the speed at which the Fed will do this. There's a lot of concern if the Fed moves way too fast on some of this stuff that you're going to see a sharp pullback in stocks. If that happens, that could just spell a lot of trouble. That could then cause the Fed to decide to reverse course or change from that plan. That could just further upset some of the upside that a lot of the stocks have enjoyed so far this year.

[Charlie Turner]

I'm speaking with Michael Wursthorn of the Wall Street Journal and you're listening to youo Money. Thanks for listening, everyone. Michael, give us some examples of sectors that were big winners in the election afterglow, but that have faded since One comes to mind are small cap stocks, right?

[Michael Wursthorn]

Yes. So small cap stocks have been enjoying a pretty good upside this year. And last year they had a phenomenal year. What we've seen now happen, starting this summer, especially in July, is the Russell 2000 has given up a lot of those gains so far this year. And you're also seeing transportation stocks within The S&P 500 pulled back quite a bit so far this summer. For analysts, that could be an early sign that the bull market could be coming to an end. Right now. Usually if you're seeing a pullback amongst Russell 2000 companies as well as transportation stocks, that could be an indicator that the economy is moving into a slowdown really of further growth. Transportation stocks. What we usually look for there is whether or not there's still robust shipping of goods across the country with those coming down and pressure on those companies. That could suggest the economy is not as strong as it was.

[Charlie Turner]

Could this be some short term thing? I mean, we could be sitting here next week or three weeks from now or a month and something will have happened to reverse course and the outlook becomes sunny again.

[Michael Wursthorn]

No. Yeah. I mean, that is one of the more frustrating things for I think a lot of people in the market right now is that there are just so many factors that are weighing on this bull market at this point. Besides the Trump administration, you do have the Fed, of course, you have corporate earnings. And there's just a lot of factors that are going to play into this. It could very well be that in the next two to three weeks that things continue to go up. In fact, I would say a lot of strategists do feel that we'll finish the year on a pretty good upside. But next year is looking harder and harder to figure out if we can really continue this market. There's just going to be a lot of challenges and corporate earnings growth is going to just become harder and harder as these companies continue to beat expectations. You're not going to be able to beat them on the same level going into next year.

[Charlie Turner]

Michael Wursthorn of the Wall Street Journal, thank you very much for joining us.

[Michael Wursthorn]

Thank you.

[Charlie Turner]

And that's your Money Matters. I'm Charlie Turner at the Wall Street Journal.

[Deel Representative]

Deal replaces fragmented Payroll vendors with one global system. No third parties. Hire, manage and pay teams in 150 plus countries. Operate like a local everywhere. Visit d eel.com WSJ.