With Trump's recent withdrawal from the Paris Climate Accord, tension regarding the Comey tapes and the ensuing uncertainty that surrounds such political upheavals, one would think that the markets would at least quiver.
Yet, the U.S. stock market has not only proven resilient against this instability, but in fact seems to thrive on it as markets continue to rise with the Dow recently breaking 100 points to reach an all-time high. The S&P 500 and NASDAQ too have been prospering ever since Trump's election, creating the illusion of a "Trump Rally". The reality is that the Trump factor may just be the required stimulus to provoke an array of already-brewing underlying market forces.
Politically, there are still many ways in which Trump's election and his consequent actions could have caused stocks to rise and investor confidence to burgeon. For one, with Trump's presidency came the promise of lower corporation taxes due to reduced regulations and subsequently the prospect of higher profits. Moreover, the possibility of increased military and infrastructure spending evoked notions of short-term economic growth for investors who assumed this would have a multiplier effect on the American economy.
Even so, these speculations could have perhaps been justified in the premature months of the new political setup- however, it soon became clear that Trump's promises were not everything they were propped up to be.
Why then, do the markets continue to rise? There are two probable reasons.
First, the initial boost that Trump's position as president sparked is still enduring, with investors seeing no palpable threat in Comey's testimony as it did in no way refer to a possible impeachment or "reveal anything the market didn't already know," according to Ryan Detrick, senior market strategist at LPL Financial.
Second, it may be that the effects of political tensions in Washington are being funneled away from the stock market and concentrated different ones: the currency and bond markets. On Tuesday, the dollar weakened due to concerns regarding the potential spillage of confidential information by Trump to Russian officials. This would inevitably attract foreign investment, driving profits and stock prices upwards further. Moreover, investors trying to benefit from rising stock prices may change their cash from bonds to stocks. The increased competition for stocks drives prices up even further, explaining the rise.
The contemptible 2.2% value that the 10-year Treasury Bond Yield is currently at promises minimal returns. A price to earnings ratio of 25.7 equates to an earnings yield on stocks of 3.9%, a figure that further justifies investing in the stock market because in the long-term, an investor is likely to get a higher return on the latter.
In an interview last month, Berkshire Hathaway Chairman Warren Buffett said, "Measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is that interest rates go up a lot, and that brings stocks down. But I would say this, if the 10-year stays at 2.3 percent, and they would stay there for 10 years, you would regret very much not having bought stocks now."