The first 100 days and the ‘Trump trade’
John Authers explains the highs and lows of the market reaction to the first 100 days of the Trump administration, as well as the key risks investors should watch out for.
Credits: Produced by Aimee Keane. Filmed and edited by Donell Newkirk.
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I regard the Trump trade as being a subset of what you could call a reflation trade. Last year we had a fascinating turn in market sentiment around about middle of the year, when people decided that the bets they had been taking on deflation had gone too far and decided to start betting on a steady reflation of assets, I think largely driven initially by China, which started stimulating its economy last year.
That means you start to see bond yields go up. When prices go down, you see stocks begin to recover. And then, when Donald Trump is elected, in an event that many, myself included, thought would be very bad for the market, you see a real shot of adrenaline for that reflation trade. Stocks go up that much more. Bond yields rise. There's a very plain additional confidence that reflation is going on, that the US is going to contribute to global reflation, pick up the baton from China. So that's what I regard as the Trump trade.
If you look at the progress of the stock market in his time in office, plainly the worst point came when it was obvious that the health care reform was going collapse, or its first attempt at health care reform was going to collapse. That had implications for tax, for whether he was going to be able to get the kind of tax reform that people wanted through.
That was a big deal. That said, it's interesting that, while that took some of the froth off and meant that we didn't get major new advances in the overall level of shares, we haven't had anything more than that.
Part of why the stock market's done reasonably well the last few days is because earnings so far this season, the single most important driver in the long term of stock prices, have actually been somewhat better than expected. Another reason why we've had quite a sharp rebound in the last week is because we've had another big political event in France, and the market liked what it heard.
Both stocks and bonds in this country, in the US, are really expensive. You can argue that stocks aren't that expensive compared to bonds, and that's a reasonable case to make. But again, all it really tells you is that you're desperate for bond yields to stay roughly where they are. Because you're admitting that that's really all that's keeping stocks high. So that has always been the greatest risk. You can't time the market on the basis of valuation.
But again, there is nothing political at all in my statement when I say, given a choice between buying when Barack Obama came to office, when stocks were actually cheap on an absolute basis, or when Donald Trump came in, you'd plainly prefer to buy when Obama came in. I would bet about as much money as I've ever had that the stock market will not do as well under Trump as it did under Obama, and that's got nothing to do with their economic policies.
It's to do with the starting price.
So that is the one big concern. Then the other concern, again, is the bond market. If the Fed tightens somewhat more quickly than expected, if it turns out that the concerns, which you spend more time documenting than I do, concerns over liquidity and so on mean that you get some kind of a disorderly move, a sharp rise in yields. A lot of US companies have a lot of leverage because the leverage has been so cheap. That would be an area of very great concern.
So because things are very expensive where they are, we shouldn't deprecate. We shouldn't talk down too much the achievement in keeping things levitating where they are, if that's where Trump ends up. The downside-- I'm not saying that I expect the downside to dominate. But the potential downside is far greater than the potential upside, given the kind of valuations we are in and the kind of leverage that is in use.