In the days leading up to the US election, RBC’s always insightful strategist Charlie McElligot highlighted how ‘nearly every account he spoke to wanted to buy a potential Trump sell off.’ In one of his notes, Charlie even sketched out how most accounts were looking for a 2-3% dip, with one particularly astute client forecasting a 5% decline. This analysis was much more realistic than the shrill pundits who were predicting the end of the world on a Trump win.
The following headline from the Huffington Post was not confined to click bait seeking newspapers:
Donald Trump Victory Would Send Stocks Plummeting 10 To 15 Percent.
There were plenty of other Wall Street Investment Banks predicting similar catastrophic declines.
Yet Charlie’s client who predicted a 5% decline ended up being spot on.
The problem was the decline occurred in the middle of the night. The S&P 500 future did indeed correct 5%, but by the time stocks opened on the day after the election, the decline had been erased, and stocks opened essentially unchanged.
There were obviously boatloads of clients waiting to ‘buy the dip.’ Yet instead of smartly catching crashing stocks, they have been chasing them higher in a buying frenzy of such orgiastic proportions it would make Caligula blush.
Have a look at the Russell 2000 small cap index ETF:
Small caps have been running like they stole something. There has been absolutely no chance to buy even the slightest dip. Up 10.5% in two weeks is one of the largest rises in history.
And the repricing has not been limited to stocks. Bonds have been absolutely decimated.
This backup in rates has sent the US dollar soaring in a consistent steady trend higher.
Whereas before the election most of the rhetoric revolved around the uncertainties surrounding a Trump win, the narrative has now morphed into a euphoric perceived return of Reaganesque capitalism.
The market has gone from abject worry to overly optimistic adulation in a bat of an eye.
I guess it makes sense. The market has assumed Trump is the next Reagan, so these moves are actually in line with how assets behaved during Reagan’s first term win.
The S&P 500 was up almost 10% in the days following Reagan’s election. The US dollar was up 4% and US 10 year treasury notes’ yield rose almost 100 basis points. The bond market decline made the most sense as markets correctly discounted Reagan’s aggressive fiscal policy:
Today’s bond market definitely worries about a repeat of 1980. The decline of the past couple of weeks has been epic.
So let’s step back and think about all of this. In the days before the election, it was assumed Hillary would win, but if she didn’t, the stock market would collapse due to Trump’s unpredictable and unorthodox policies. When Hillary lost, instead of stocks crashing, investors went on a buying rampage because Trump’s policies were so ‘business friendly’? But, but, but… Why wasn’t Wall Street and all the other business community actively supporting Trump ahead of the election?
We all know the answer. Trump is a loose cannon. He is beholden to no one, and although that might have gotten him elected, it certainly does not play well with the corporate and political elite. He is the anti-establishment President.
So why does the establishment think Trump will somehow now tack to the middle and take care of them?
I understand why you might argue Trump’s indicated policies might be construed as stock friendly/bond negative, but this is assuming Trump is able to institute them.
I don’t want to argue about politics. Lord knows everyone is sick of hearing some asshole-on-the-internet’s opinion. So don’t take this next point as a condemnation of Trump. I am only interested in Trump’s performance versus what the market has priced in. If the S&P 500 was down 15% or 20%, I would probably be arguing the worry about Trump was overdone and you should be buying stocks. But equities are not down, they are up. And in some cases like the small cap segment, up a lot.
The Trumpflation trade is over done. The market has overestimated Trump’s ability to get things done. Have a look at Trump’s behaviour over the past couple of days. Trump spent two days in a row chastising the cast of the Hamilton play for lecturing Vice President elect Pence.
Whether you think the cast of Hamilton was correct to single out Pence, Trump’s reaction has shown extremely poor judgment. Trump has so many decisions to make, the last thing he should be worrying about is whether some Broadway actors were rude to his Vice President.
Even Pence himself showed considerably more maturity in dealing with the situation. From Fox news:
Vice President-elect Mike Pence spoke publicly Sunday for the first time about the mixed reception he received while attending a performance of the musical “Hamilton,” saying he doesn’t want an apology from the Broadway cast and that the audience’s boos and cheers “is what freedom sounds like.”
Pence, a Republican, attended the show Friday night. Actor Brandon Dixon afterward delivered a statement on behalf of the cast that in part said, “We truly hope this show has inspired you to uphold our American values and to work on behalf of all of us. All of us.”
Pence on Sunday said he, his daughter and her cousins “enjoyed the show” and that he “reminded them this is what freedom sounds like.”
Pence said he wasn’t offended and that he didn’t want an apology.
“I’ll leave it to others to decide if [the stage] was the appropriate venue,” he said
Regardless of what you think about Pence’s politics, it is difficult to argue that he didn’t handle it as a grown up. Unfortunately the same cannot be said of Trump.
You might be saying to yourself, “so what? Trump is shaking things up and we need it.” And maybe that line of thinking would be right.
But the important thing to realize is that “shaking things up” is not conducive to higher financial asset prices. The market is assuming Trump will behave the way previous politicians have behaved. They are greatly misreading Trump.
The market missed the potential of a Trump win, and they are now making another error assuming they know how Trump will govern. The risks of a negative outcome are considerably higher than the market assumes. Trump won the Presidency by listening to no one but himself. He is not going to start taking advice anytime soon.
I am fading the Trump rally. I have started my short US dollar position, and will add on any decent rallies. Although I am a huge bond bear, I have covered my position (too soon) and will wait for a rally to sell into. Most importantly, I am shorting US stocks versus other indexes into this euphoric rise.
The market is too optimistic everything will be peachy keen under a Trump Presidency. I think markets will be just as volatile as Trump himself. After all, this is the guy who is making a big deal about some actors reading a few lines at the end of the play to Pence. And as Alex Q. Arbuckle tweeted in one of the funnier lines I read over the weekend, that’s definitely the worst thing that has ever happened to a politician at a play…
Thanks for reading,