If you bought the "wow, Trump is actually going to win" dip in S&P (NYSEARCA:SPY) futs on November 9 and then watched as your trade panned out spectacularly over the short span of just 16 hours, then I congratulate you.
If you stuck around and played the subsequent reflation trade, then you made yourself quite a bit of money.
The wave investors rode following the election was all about cross-asset correlations. More specifically, the reflation narrative found expression in negative stock/bond return correlations and positive correlations between USD (NYSEARCA:UUP) and rates (NYSEARCA:TLT)/stocks.
Those correlations held through the end of the year and then began to break down for a variety of reasons, including questions about where rate differentials are headed (i.e. how long will they remain unequivocally USD favorable?) and weak dollar rhetoric from the Trump administration.
As you can see from the chart, stocks have thus far remained resilient which I think it's fair to say is at least partly a reflection of the fact that equity markets just aren't as efficient when it comes to pricing in nuance.
In any event, it's becoming increasingly clear that the growth-friendly policies that underpinned the reflation story are going to take some time to pan out. I highlighted the following chart from Goldman (NYSE:GS) on Monday in an effort to give you an idea of just how drawn out a process tax reform and fiscal stimulus implementation will likely turn out to be:
Meanwhile, the aspects of Trump's policy platform that investors view as more "negative" (where "negative" simply means controversial and/or not specifically focused on driving growth) are moving forward at warp speed (more on that here). Here's a bullet point breakdown from Goldman:
- Inflation themes have rallied and remain close to post-election highs…
- …but growth themes are more ambiguous.
- The US economy is already close to full employment…
- …so the scope for growth is capped.
- While pro-growth policies could support a revival in productivity…
- …this outcome is speculative at best and would take years to realize.
- Small business growth sentiment surged in November and December…
- …but hard data have been more subdued.
- Fund flows and household surveys suggest the surge in growth sentiment is probably peaking…
- …consistent with what growth-sensitive assets have been pricing.
The narrative - and remember, narratives are important - has been thrown into question, leaving investors to wonder what comes next.
On Monday evening, Goldman was out with a new note documenting the Trump trade reversal and speculating on where we're ultimately headed. Here's a chart that depicts how a variety of assets have performed since the bank's risk appetite indicator peaked on December 13:
Things worth noting there include the momentum reversal for USD/JPY, the stagnation of the momentum in 10Y yields, and equities' resilience in the face of that reversal and stagnation, respectively.
We can zoom in and take a closer look to get a better idea of what that chart shows. Have a look at this:
(Chart: Goldman, my highlights)
So basically, the dark blue bars represent returns from the election to the height of "Trump trade mania," so to speak. The light blue bars are the returns from that peak until now. The grey bars represent reversals. Perhaps the easiest way to think about it is to note that in order for the grey bar to be positive, the dark blue and light blue bars have to be opposite. A negative reversal amount means the trend has continued (the VIX is a notable example)
Here's a bit of color from Goldman, reinforcing the points made above about the post-election action:
The election of Donald Trump as US President in November 2016, initially were associated with a number of so-called 'Trump trades' doing well. For example, short EM, long USD, short duration, long inflation, long financials v. staples, long value v. growth and long cyclicals v. defensives all did will immediately following the election. This was associated with one of the highest levels of risk appetite since 1990 being reached in mid-December, as measured by our GS risk appetite indicator. However, in recent weeks some of these trades have reversed, raising the question of "where to from here?" by some investors we have spoken to.
Those charts are important. They provide you with a very handy guide to the Trump trade. You can see how it evolved across assets in the weeks after the election and how it's evolved since what Goldman essentially calls "peak Trump" on December 13.
You should also note that the negative reversals (i.e. the assets that have continued their post-election trends since the peak), tell us perhaps more than the reversals tell us.
For instance, the charts above show us that the situation in EU periphery debt markets is continuing to deteriorate. Consider the following chart (note: I threw France in because of the election uncertainty):
The same is true for volatility, only in the opposite direction (i.e. the continuation of the trend in periphery sovereign yields is a bad thing, but the continuation of the trend in volatility is ostensibly a good thing unless you take into account the fact that these two trends are telling completely different stories about risk):
As always, you have to make your own judgments. I give you the information and the analysis and you're left to decide what it means for your investments.
Indeed there's something rather nonsensical about producing market analysis for public consumption and then handing out recommendations. I don't know you or what's in your portfolio, so I can't possibly give you any tailored advice.
But what I would encourage you to note is that although there's a lot of talk about the reversal of the Trump trade, we really haven't seen evidence that the market has given up completely on the reflation narrative.
As Goldman puts it, "few trades have actually 'reversed' performance in a meaningful way."
So all you have to do is decide whether the market will continue to keep the faith - so to speak - or whether investors will finally give up on the story altogether.
That has real implications for whatever you're holding.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.