(Bloomberg Businessweek) -- When U.S. President Donald Trump delivers his first State of the Union address on Jan. 30, expect him to champion his status as a capable steward of financial markets. It’s only fitting, as the initial iteration of what came to be known as the “Trump Trade” in the wake of his victory was a state of the union unto itself: the simultaneous surge in U.S. stocks, Treasury yields, and the dollar.
Markets took their cues from the potential for pro-growth fiscal policies, as well as deregulation, that would stoke economic activity and inflation, while the president’s penchant for protectionism served as a presumptive catalyst for the currency.
Then Trump assumed power and became stuck in a legislative quagmire. His bark on trade issues proved to be worse than his bite. The world around him changed. So, too, did the contours of the Trump Trade. Still, some of its components remain intact and reinvigorated, thanks to the recently passed tax overhaul.
Equities responded to Trump’s win by echoing one of his favorite phrases on the campaign trail—“America First”—with U.S. benchmark gauges besting their peers. But that dynamic didn’t last long. Economic data around the world started to exceed analysts' expectations, with the ensuing reflationary forces—especially the rebound in commodity places—fueling outperformance by emerging market equities. Japanese equities have also managed to post better local-currency returns than their U.S. counterparts since the election.
However, within the U.S. equity market, segments thematically linked to the incoming administration’s policies gained more than the market as a whole.
Banks were the big winners from deregulation and lower corporate taxes, as the new president pledged what he called a "historic" increase in military spending.
The president deserves no small share of credit for the stock market records set during the recent melt-up. Earnings growth strengthened, thanks to robust economic performance outside the U.S., but the incremental boost attributable to tax reform is meaningful. Analysts are upgrading their profit estimates for S&P 500 companies at a record pace, and the companies seeing the biggest positive changes are the ones offering guidance on future tax burdens, notes Credit Suisse chief U.S. equity strategist Jonathan Golub.
Fears that the U.S. would enact a border-adjustment tax to encourage domestic production and engage in a trade war, particularly against Mexico and China, drove the dollar to a 14-year high before the end of 2016. But any protectionism premium has significantly dissipated, thanks to the synchronized global expansion and a relative dearth of newly erected trade barriers from the White House.
The drop-off in the dollar is certainly to Trump’s liking. Just before his inauguration, the president called the greenback "too strong.” A weaker dollar not only flatters the value of profits earned abroad by American companies, but also helps shift the pendulum toward accomplishing two of the president’s main and interrelated goals: overseeing a U.S. manufacturing renaissance and slimming the nation’s trade deficit.
In foreign exchange, it’s been a case of “buy the rumor, sell the news.” The Mexican peso has been the best-performing major currency since Jan. 20, 2017; the yuan, whose value Trump claimed was artificially depressed by Chinese authorities, has also advanced relative to the dollar.
Significant uncertainty surrounds the future of U.S. trade relationships, but the story so far under Trump has been one of worst fears not being realized. Nafta renegotiations are ongoing, but there’s been no hint that the president is on the verge of notifying Mexico and Canada of his intention to leave the pact. And the recently issued tariffs on imported solar panels and washing machines weren't as severe as the affected parties, such as JinkoSolar, had expected.
The initial post-election spike in Treasury yields and steepening of the yield curve reflected a belief that the businessman-turned-president, with a unified Republican Congress at his side, would kick-boost U.S. activity following years of relatively sluggish growth since the financial crisis.
The start of Trump’s presidency did much to curb enthusiasm. Republicans failed to repeal and replace the Affordable Care Act. The few signs of progress on tax reform were better than no indication that an infrastructure plan was in the works.
Market-based measures of inflation expectations, which jumped in the wake of Trump’s win, are on the rise again. This time, though, bets on accelerating price pressures appear linked more to a factor largely outside the president’s control: the cost of a barrel of crude oil.
But the Treasury market is still taking some cues from the President's policies. Issuance of U.S. government debt is poised to explode, and that's a factor behind a consensus view that the 10-year yield will rise to 2.9 percent by the end of 2018.
Bottom line: while many essential elements endure, an examination of the Trump Trade reveals that the President’s “America First” aspirations haven’t been realized—overwhelmed by larger global forces driving financial markets.
To contact the author of this story: Luke Kawa in New York at lkawa@bloomberg.net.
To contact the editor responsible for this story: Dimitra Kessenides at dkessenides1@bloomberg.net, Jeremy Herron
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