In the weeks immediately following the election of President Donald Trump a few common themes seem to strike the market.
The so-called Trump trade that saw stocks rips upwards, bonds tumble and inflation expectations take off as the possibility of policies such as deregulation, fiscal stimulus, and tax cuts enticed investors.
It seems, however, that three weeks into the Trump presidency the trade is starting to wear off.
The enthusiasm in markets following the election of Trump (which it should be noted was the opposite reaction of consensus) has seemed to wane since the inauguration as investors digest the president’s policies.
Stocks have cooled off on a relative basis in recent days. From the election on November 8 to Inauguration Day the S&P 500 and Dow Jones Industrial average jumped by 6.2% and 8.2% respectively. Since the inauguration, the indexes have moved up just 2.0% for the S&P and 2.3% for the Dow.
Even some of the biggest potential winners from Trump’s policies have cooled off. Goldman Sachs rallied by 27.6% between the election and the inauguration, and since then it has gone up by only 4.9%.
Bonds also have managed to slow down their selling that started following the election. The US Treasury 10-year note yield was 1.8547% on November 8 and lept to 2.4468% by January 20 (remember: as bond prices go down, yields increase). Three weeks later and the 10-year yield has actually dipped slightly to 2.4055% on Friday.
The currency markets have also cooled off on the Trump trade as well. The Mexican peso, which had collapsed against the US dollar following Trump’s election, has actually strengthened since the inauguration. The dollar, which was surging, has also lost some of its gains against the world’s major currencies.
As noted by Bloomberg’s Luke Kawa and Brian Chappatta, even inflation expectations — which had been the one continuous part of the Trump trade — have begun to cool off as investors question whether or not the fiscal stimulus Trump promised is going to come through.
While the timeframe is shorter between inauguration day and now, many of these moves plateaued in mid-December after the initial rally under Trump. For instance, Goldman Sachs has only moved 2.2% since December 30, two weeks before the inauguration, and the 10-year yield on that day was 2.444%.
It appears that much of the slowdown, according to some of the world’s biggest investors, is due to the policies that Trump has implemented since he got into the Oval Office.
Following the election, it was clear what Wall Street and investors wanted most out of Trump: tax cuts and deregulation.
In fact, according to FactSet data, during fourth quarter earnings calls, 85 of the 317 S&P 500 companies that have reported so far mentioned tax policy under Trump, the most of any of his proposals. Regulation came in second with 63 companies mentioning it.
While Wall Street was hoping for a lighter tax bill and regulatory reform, Trump has instead signed executive orders focusing on immigration and trade barriers, both of which most economists have said will be economic drags.
Larry Fink, the CEO of the world’s largest asset manager BlackRock, said that there are “dark shadows” hanging over the markets, partly due to the recent moves by the Trump. Fink also said that the markets look “bi-polar” and he wouldn’t be surprised if there were “setbacks” for stocks.
Hedge fund giants and large institutional investors have also begun to shift their thoughts on Trump, worrying about his protectionist and anti-immigration stances instead of cheering the possibility of tax and regulatory changes.
Ray Dalio, head of the world’s biggest hedge fund, Bridgewater Associates, initially was enthusiastic about the pro-business policies under Trump but after just a few weeks of Trump, he said in a letter to clients his opinion had shifted.
“Nationalism, protectionism and militarism increase global tensions and the risks of conflict,” Dalio’s letter said. “For these reasons, while we remain open-minded, we are increasingly concerned about the emerging policies of the Trump administration.”
While all of Trump’s policies were part of his platform when he was a candidate, the order in which he is addressing these promises and the fact that he is following through is apparently surprising to many investors.
The next move
It does, however, appear that Trump may shift his focus to the changes that businesses and investors wanted to see in the first place.
Trump said during a meeting with airline CEOs that he expects to have a plan to slash corporate and individual taxes in two to three weeks. He also signed executive orders directing the Treasury and Labour departments to re-examine and possibly roll back the Dodd-Frank banking regulations and the fiduciary standard for financial advisors, respectively.
In order for a resumption of the post-election Trump trade, there will likely have to be a shift in focus toward the policies business are excited about. If instead, Trump focuses on immigration bans, border taxes, crowd sizes, and inaccuracies regarding voter fraud influence on the popular vote, the Trump bump may be over.
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