The US stock market has continued to pop following the New Year holiday break, with the benchmark indicator surging 0.6 percent on Tuesday to within a whisker of the historic 20,000-mark reached last month.
The Wall Street rally has helped lift stocks in other major global bourses since Donald Trump won the presidential election in November.
The Trump effect has become a dominant factor in swaying investor sentiment in Hong Kong, which is closely tied to the US through the linked exchange rate mechanism. Expectations of Trump’s economic policies, including tax cuts, infrastructure spending and financial deregulation, are having a major influence on the highly internationalized Hong Kong market.
But, after the great market run since November, a growing number of stock analysts in Hong Kong and the US are now wondering when the rally will hit a speed bump. Lurking at the back of everybody’s mind is the specter of higher interest rates that could upset the market's apple cart.
So far, the big bet is on Trump’s ability to make good on his many promises to stimulate economic growth. If things work accordingly, the projected rise in corporate earnings can fully justify the surge in stock prices.
The proposed increases in infrastructure expenditure can fuel inflation, calling for the Federal Reserve to raise interest rates. This is usually not a problem when bigger public spending can achieve the desired effect of lifting economic growth, resulting in greater loan demand.
What many economists find worrisome is the scenario in which inflation expectations, arising from a projected widening of the budget deficit, will leave the Fed with no choice but to raise borrowing cost. That could is discourage investment and depress asset values. The surge in longer-term interest rates as reflected in bond yields points to a potential problem for 2017 unless, of course, Trump can deliver.
At this point, some analysts are asking if the market rally has gone too far, too fast. Nobody seems to have a definite answer. Your bet is as good as that of the experts.