Almost two months into his Presidency, markets are gaining a more complete and nuanced understanding of the promises and reality of a Trump administration. Xtrade reviews the developments so far, with an eye on where they are going.
The election of Donald J. Trump as President of the United States brought with it expectations for tax cuts, trimming of the regulatory burden and infrastructure spending, causing traders to bet on reflation after the Obama tenure of minimal growth. Two hallmarks of the "Trump trade" were expected to be rising interest rates and a strong dollar.
Reality vs. Expectations
Survey (so-called soft) data now front-runs the reality (of hard data), as evidenced in the Goldman
leading to a-widening unsustainable consumer optimism about their future expectations. The question is reconciliation.
US equities continue to creep higher, with the S&P 500 100-Day rolling historical volatility index at a decade-low level. Analysts and the Fed (see below) continue to expect a subdued US GDP growth relative to historical norms (and thus bonds returning more than stocks). Equity investors are starting to get nervous and adding downside protection (as measured by the costliness of S&P500 puts to calls). And yet, the VIX volatility measures remain low, with a multi-year low (20%) option-implied probability of a decrease over the coming year.
Sanguinity reigns, with volatility at surprisingly low levels globally across all financial asset classes.
All sorts of untoward developments could derail this mind-set and reality, like: delay or cancellation of any of the key Trump agenda items in Congress, including infrastructure spending or reform of healthcare or tax reform; an inelegant unwind of the Fed $4.5 asset overhang; or foreign sorrows like North Korea, Italian banks or French elections.
The March FOMC rate hike and projected future pace (“dot plot”) were both unsurprising and comfortably within market expectations (nearly identical to the December predictions). The Fed remains convinced that Trump-released animal spirits and regulatory/tax –lite markets notwithstanding, US GDP growth will remain in the now-normal “secular-stagnation” sub-2%. Markets reacted to this dovish Fed stance with rallies in all asset classes and by punishing the U. S. Dollar.
So to return to our headline theme, the answer STILL depends on who you believe: the professional financial-technocratic class or Trump and his voters.