Can Stocks, Bonds, Metals, Currencies All Be Wrong About Trump? Yes

bear-market-bearMy Comments: Perhaps it’s just time to go along for the ride and hope for the best. But I’ve never thought “hope” was an effective investment strategy. If the chance of a Lloyd’s of London type event was not so high, I’d be much happier.

By James Mackintosh | Nov. 28, 2016

Markets may not be the perfectly efficient trading venues of economic theory, but they do tend to be internally consistent. And so it is with Donald Trump. Three weeks after he won the U.S. election, pretty much every investment is telling the same story: renewed growth and inflation in the U.S., no retaliation by emerging markets for any tariffs he might impose and no foreign-policy mistakes.

As a result, there are multiple confirmations for the market’s interpretation of Mr. Trump, whether you look at the prices of shares, bonds, gold, metals or the dollar. How could so many asset classes be wrong?

Actually, quite easily. The danger is that investors are responding to their own prejudices, then receiving reinforcement from one another. While the market is internally consistent, that isn’t enough if it has misjudged the big picture—as it often does on the economy, and even more so on presidents.

The moves since Election Day are big, but in reality are just the acceleration of a trend that already was under way. The market noticed the scent of growth in the summer, and had been slowly switching away from bearish bets since the time Americans went to vote.

Bonds offer the most obvious example, with 10-year Treasury yields (which move inversely to prices) hitting a new low of 1.32% in early July, and rising ever since. By the election they were up to 1.86%, and have since leapt to 2.33%. Investors who held on have lost 7.4% in the 10-year since early July, the most over a similar period since the so-called taper tantrum of 2013.

The pattern in equities has been similar. As bond yields rose, growth-sensitive cyclical stocks beat safer defensive shares. By Election Day, cyclicals were well ahead, and have since gone stratospheric. Meanwhile, prices for industrial metals are surging. Gold has been left behind.

The market often misreads these big macro stories. Take the 2013 taper tantrum, or a period in 2010 when markets bet big on a rapid postrecession recovery—only for panic to set in when the economy proved weak.

One hopes Mr. Trump will inherit a recovering economy and boost growth further, and those who jumped onto market momentum will be right, if for the wrong reason.

But history suggests markets aren’t that good at judging presidents. And that presidents just aren’t that important to stock prices. The worst performance of U.S. stocks between Election Day and Inauguration Day came ahead of Franklin Roosevelt, Richard Nixon and Barack Obama’s first terms and Lyndon Johnson’s 1964 election, according to calculations by Birinyi Associates. Yet after FDR and Mr. Obama took office, the market boomed, while it did perfectly well under Nixon and LBJ.

The market wildly misjudged the potential of Herbert Hoover. His election-to-inauguration stock price jump hasn’t been bettered, but the 1929 crash was on his watch and no president since has overseen such poor returns. Dwight Eisenhower was rare, being welcomed with strongly rising stock prices which carried on up once he took office.

The 3.4% rise in the S&P 500 since the election is already more than Ronald Reagan received between the vote and inauguration in either of his terms. Maybe this time the market’s right, and a new boom beckons. Maybe.

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