Where did the Trump trade go? Eaton Vance looks at reasons why the Trump trade has faltered
Trump may not get its way on pro-growth initiatives.
The markets showed a clear pattern in the weeks following President Donald Trump’s election victory: stocks rallied, Treasury yields rose and the U.S. dollar strengthened. Some investors and commentators called it the ‘Trump trade’.
However, according to Eric Stein, Co-Director of Global Income at Eaton Vance, a leading global asset manager: “Fast forwarding to today, although equity markets seem to hit new highs daily, yields on the U.S. Treasuries have fallen this year and the dollar has weakened recently. Some of this may be doubts that the Trump administration will not get its way on pro-growth initiatives such as tax cuts and infrastructure spending.”
Mr Stein says “Although there are a wide range of potential outcomes, we still believe the U.S Treasury bond and currency markets may have gotten too pessimistic on the potential for tax cuts and infrastructure spending.
“We would also urge investors to maintain a long-term view and not get caught up too much in the daily drama and short-term noise in Washington,” he says.
He outlines the reasons why ‘Trump Trade’ has faltered.
“Some of the recent decline in Treasury yields, inflation expectations, and the dollar can be attributed to U.S. data that has been somewhat weaker than expected. However, the unwinding of the Trump trade has also been driven by doubts the administration will able to make good on its policy changes to promote economic growth. For example, there are questions over health-care reform and the chances of an overhaul of the tax code.
“At the same time, it’s easy for investors to get distracted by the political fireworks in Washington, such as this week’s testimony from former FBI Director James Comey. I was reminded of this recently. A few weeks ago right after Comey was fired, I asked participants at our Fixed Income Group morning meeting what probability they assigned to Trump not serving his full four-year term. It was interesting what a passionate and interesting discussion ensued following my question, with very different answers across the people attending the meeting.”
He says “Don’t bet against a Trump comeback.”
“While many investors are now completely discounting the possibility of any accomplishments from the administration, I wouldn’t count Trump out.
“President Trump is certainly a polarizing figure who makes it tough for many to have an unemotional conversation about him. Whether you like him or dislike him, any neutral observer would have to admit that he has shown the ability to come back from many personal and professional setbacks in his life. That’s one reason why Treasury and currency markets may be too pessimistic on the potential for reforms right now.
“The easiest reforms for the administration would be in the area of regulation because that is where President Trump is far less dependent on the Congressional legislative process. If he can start with some easy wins in the area of regulation, maybe there will be the potential for some progress on the tax and infrastructure fronts as well.”
Mr Stein says “Investors should always be on the lookout for both sides of the distribution of market and economic outcomes when assessing President Trump (pro-growth reforms vs. Twitter spats and self-created distractions). When markets get too focused on only one side, they may start to turn the other way.”
