US stock market opened lower today, in the first trading day of the week. All 3 major indices, Dow, Nasdaq, and S&P 500 are facing selling pressure. Is this something to worry about, or a natural reaction to the latest stock market rally after the US Presidential Election a few months before?
Stock market reacts to news over weekend
The recent decision from President Trump to ban for a period of 3 months the entry of Muslims citizens from 7 countries could be the main cause of the reaction of the financial and capital markets today. This could be both bad and good, though.
It could be bad news, as uncertainty and risk are now present, and investors need to focus now on both valuation and market expectations of promised political and Business financial changes. It could be good also, as after some time the investors and traders will start realizing the difference between a promise and a reality, such as changes in global financial expectations. For example, infrastructure capital spending and protectionism can favor US dollar appreciation.
Stock market rally may need correction
In the last few months, there was a strong rally for all 3 major US stock market indices, and there is always a need for equities prices correction. Nothing goes straight up for an infinite time period, it is not logical.
If it was true, then financial bubbles would be created very soon. It is not a healthy market, watching stocks with poor fundamentals increase radically in price based on momentum trading and not on what really counts -- valuation based on market expectations.
As we are in the full earnings announcement period, any sell-off in stock prices is not a major concern.
It is vital to witness it, to assess if fundamentals can really attribute to a rally continuation, or, if we have gone too far, too quick, with many equities now overvalued. As we have the FED announcement later this week about a future interest rate hike, it is important to consider that in any rising interest rates environment, there is an inverse relationship with intrinsic stock prices.
