US stocks to maintain upward path

US stocks hit record highs last week as President Donald Trump revived talk of tax cuts and infrastructure spending.

The record run is likely to continue this week as long as earnings from retailers such as Target are not too dire. But, with stock valuations inflating to near bubble-like proportions, investors have begun wondering how long the "Trump trade" can last.

Despite some wobbles in January and early February, stocks have amassed impressive gains since the election of Mr Trump, with the broad Standard & Poor's 500 up about 7 per cent and the Dow Jones Industrial Average rising more than 10 per cent to top 20,000. While Mr Trump's blunt promises have done harm to immigrants and to America's reputation, they have fuelled rallies in the sectors that he favours. Airline stocks soared last week when Mr Trump met a group of executives from major US carriers and vowed to give the industry more of a say in the Federal Aviation Authority.

Bank stocks, meanwhile, are having their best streak since the aftermath of the financial crisis, largely thanks to Mr Trump's deregulation promises. Despite campaign promises to make Wall Street pay, the Trump administration has pandered to the big banks, addressing their every complaint. Bank executives and hedge-fund managers - such as Treasury Secretary Steven Mnuchin - have long protested that the constraints placed upon them by the Dodd-Frank Wall Street Reform and Consumer Protection Act have been a millstone around the neck of the financial system, slowing the flow of credit and thinning out markets to the detriment of the economy. The truth is there's a delicate balance between regulation and risks in financial markets like that between the lion and the lion-tamer. Mr Trump and Mr Mnuchin appear determined to fire the lion-tamers and let the lions take over the circus.

It was the promises on broader economic matters during his meeting with the airline executives that gave the market its biggest lift, however.

Mr Trump promised the executives that something "phenomenal" was about to appear in the coming weeks on the tax-reform front. He also said that they would benefit from his infrastructure plans. By doing so, he broke his silence on the two hopes that had underpinned the post-election rally, which was driven by companies that stood to gain from road building and tax cuts. For the stock market, Mr Trump's talk to the airline executives was a welcome return to his "pro-business" message, said David Lafferty, chief market strategist at money manager Natixis Global Asset Management.

"We are particularly encouraged to see strength in a variety of US manufacturing indicators, and signs suggest that an inflection in capital expenditures is imminent," said Tim Shirata, vice-president at money manager Guild Investments, in a note to clients, adding that anticipation of an infrastructure bill was likely part of the reason factories have increased output. "Optimism is in the air, and there is a willingness to put capital to work to reap the benefits of real growth."

Another promising sign is the rumbling of increased demand in China. Copper futures have surged in recent weeks, in large part because of a strike in the largest copper mine on the planet, Escondida in northern Chile, but also because of increased purchases in China. In its earnings report last week, Cummins, a maker of truck engines, noted that there were early signs of a recovery in demand for construction machinery.

Mr Lafferty said that it looks like the "China growth scare sort of bottomed and is fading".

There is a thin line between optimism and euphoria, however. Some analysts, including those at Bank of America Merrill Lynch Global Research, sense danger in the blind faith in Mr Trump's economic policies. So far, as illustrated by an appeals court's reversal of the "travel ban", the new administration has not demonstrated a flair for the mechanics of government.

Mr Lafferty said that the stock market retains an upward bias, but it might be somewhat constrained.

"The market just isn't cheap . . . (there is a) little bit of gravitational pull limiting how high it can go."

Meanwhile, the slow-motion disintegration of the eurozone threatens to continue. Greece came close to crashing out of the eurozone in 2014. Britain shocked the world last year when it voted to leave. Now Marine Le Pen, the leader of France's far-right National Front, is leading in the polls for the first round of the presidential election. A Le Pen victory would be Greece, Brexit and Trump rolled into one.

"The two-step election process still has Le Pen as bit of a long shot," said Mr Lafferty. "But I absolutely think it's important to keep an eye on it. It goes much more to heart of the eurozone than either the Greek crisis or Brexit."

While earnings growth has been generally strong, there are low expectations for the retail sector, which starts reporting en masse this week. For every Amazon.com warehouse that pops up on the outskirts of major cities, another mall is abandoned. Companies as diverse as Macy's and lunch-box maker Newell have warned their investors that they do not expect shoppers to ever frequent bricks-and-mortars stores as they once did.