“Cautiously optimistic” is considered a cop-out stance, and not without reason. It’s a way of blandly stating, “Things usually work out fine, but I’m not unaware of the risks.” Yet for whatever it lacks in originality and boldness, cautious optimism is often where investors as a group land, a result of the long-term positive tilt to markets alongside the ever-present hazards. And it’s where Wall Street finds itself now, two weeks into a new year, beyond the bull market’s second anniversary, entering a new leadership arrangement in Washington. First came a burst of undiluted optimism and tension release after the Nov. 5 U.S. election, upon which traders tried to execute the dusty 2016 post-election playbook against a backdrop not perfectly suited to it. It was a “reflation” trade in an economy and policy regime trying to disinflate, a rush for riskier small-cap stocks that thrive early in a cycle unleashed into a more mature expansion. .SPX 6M mountain S & P 500, 6 months Greater caution quickly set in within weeks and then deepened with the rise in Treasury yields and hawkish rhetorical turn by Federal Reserve officials a month ago. Beginning just after Thanksgiving, the majority of stocks began to sputter, economically geared groups registering concern that 10-year Treasury yields much above 4.5% could undermine growth, the median S & P 500 stock fully 12% off its high by the start of last week. Mere weeks after Donald Trump’s win, wised-up market observers began floating “Buy the election, sell the inauguration,” as a clever play – the typical party/hangover, euphoria/disillusionment arc. As it happened, the selling started taking hold six weeks ahead of the inauguration, and last week’s assertive rally suggests the tape might be better for it, at least for a while. What ended up as a 5% peak-to-trough pullback in the S & P 500 during a couple weeks contending with its 50-day average was enough to test the index’s pre-election level while allowing the shadow of worry to encroach on a previously bulled-up consensus. Pullback over? This attitude adjustment was mostly visible in the sharp retreat in bulls relative to self-professed bears in surveys of amateur investors and professional investment advisors. Fidelity’s head of global macro Jurrien Timmer notes, “After a period of post-election ebullience, sentiment has turned sour again, with the Investors Intelligence survey down to 42% bulls and 32% bears. This is what you want to see if you are bullish.” Generally, this is the case: Falling enthusiasm in response to routine pullbacks serve as helpful resets that refresh uptrends. Still, it’s not always immediately or unfailingly a perfect contrarian cue, sometimes marking a genuine change in market character. The II poll in general tends to spend most of the time with a wide bull-over-bear advantage during strong market advances. BTIG technical strategist Jonathan Krinsky notes the mood shift: “Soft data (surveys) have flipped quite bearish. We prefer to see this in conjunction with hard data (transactional) for a better contrarian indicator, but it’s a start. [National Association of Active Investment Managers] exposure actually ticked higher last week and put/call ratios remain quite low.” Further real-money field-position color comes by way of Deutsche Bank’s strategy group, which at the end of last week noted, “Our measure of aggregate equity positioning fell from its mid-November highs near the top of the long-run historical band to a two-month low this week, about halfway down to neutral.” Down by half the distance that separates historically heedless and neutral is not exactly a “buy when blood runs in the streets” moment, but it lowers the hurdle that good news must clear to support the market. This upwelling of worry came just as the observable fundamentals began to look more encouraging. It’s been a pretty upbeat run of data from the strong December jobs report to healthy core retail sales to an upside surprise in industrial production to a blessedly cool core CPI reading to an upwardly revised Atlanta Fed real GDP tracker for the fourth quarter rising back to a 3% annual rate. Not to mention some pretty unblemished earnings from the biggest banks. US10Y YTD mountain U.S. 10-year yield, YTD The Street was freed by Treasury traders to celebrate all this as bond buyers at last surfaced following Wednesday’s softer core CPI number and Fed Governor Christopher Waller’s dovish take on the potential for further rate cuts by mid-year. The 10-year slipped from a high near 4.8% back to 4.6% over a few days. How much will Trump policies matter to market? It’s enough to make a disinterested investor hope that not much at all changes with the turnover in administration, at least to the broad drivers of the economy. And, never forget, while fiscal policy and economic stewardship matter quite a bit for the country — and Wall Street has been obsessed with handicapping the sequence and efficacy of Trumponomics 2.0 – policies’ interplay with equity-market performance is both tenuous and unpredictable. Don’t believe it? The S & P 500 annual total return since Joe Biden’s inauguration on Jan. 20, 2021, is 13.4%. That’s indistinguishable from the 13.5% yearly gain the index has put up for the past ten years and within a smudge of the 15-year pace of 13.8%. This isn’t to suggest such a rate of appreciation is a law of nature or every American’s birthright. Indeed, it’s well ahead of the longer-term average closer to 10% and has resulted in a more expensive starting point for new money entrusted to a passive S & P 500 fund today. And for sure, there’s a good measure of coincidence in the way the returns line up so neatly over these periods. Still, it’s hard to see those results, over varying spans under three presidents and various party configurations and conclude that the DC agenda is the key swing factor in dictating investor outcomes. This won’t stop the market from trading each flash headline about the cadence and scope of tariffs, the breadth of any immigrant deportation plans and sundry deregulatory declarations. The tape trades each marginal dose of news, and these will be pertinent ones over compressed time frames. Perhaps the clearest influence on the underlying market dynamics will be the extent to which vague but avid expectations for a lighter regulatory touch encourage investors to give stocks a longer leash until details are settled. It will simply take a lot to pull many investors off the trust in “pro-growth policies.” And expectations of quickened corporate deal flow seem quite well-grounded, no matter what else emerges. This will serve as a propellant of risk appetites unless and until the froth boils over. As it is, the speculative bid for lottery-ticket payoffs in crypto proxies, underbaked quantum-computing plays, leveraged ETFs and the like has remained very active even through the recent cooling of bullish spirits more broadly. The crowd has apparently sensed that we are entering a period when the only shame involved with a quick buck is not reaching for it, when begging forgiveness later beats asking permission in advance. In the meantime, the core of the equity market has come through some modest choppiness with a loss of momentum but no grave injury to the trend, earnings season can now serve as a welcome distraction from macro debates and the bond market has again stopped just short, for now, of dispensing enough punishment to break the will of the bulls.