The Trump Trade Seems Mostly Reversed

The stock market sold off moderately on Monday due to the continued negative momentum caused by the failed GOP healthcare bill. There is talk of Paul Ryan possibly being removed from the Speaker of the House position which is something I discussed previously. Ordinarily, that would be bearish for stocks because it adds to the political tumult in Washington. However, the way I see policy going, it may improve the odds of stimulus being passed. The next Speaker must receive support from the House Representatives, so the replacement would be a consensus candidate. He/she may be better able to organize the GOP to pass economic reforms.

The worst-case scenario would be if President Trump called for Paul Ryan’s resignation and the GOP couldn’t agree on a replacement. The best-case scenario would be if the replacement garnered the political momentum to pass legislation. This is all hypothetical. The current situation is the GOP is at a standstill with regards to passing reforms which will boost the economy.

The stock market’s performance is a small part of Monday’s action in the markets. If you looked at only the stock market, you would see an about 2.5% correction in the S&P 500. In today’s market, that’s a large correction, but anyone with more than 8 years of experience would interpret that as a ‘nothingburger’ move. The more significant action is in the 10-year bond and the dollar. The 10-year bond yield was down about 4 basis points on Monday. The move in the past 3 weeks has been remarkable. The yield was about to break out and form new highs in mid-March. It has promptly reversed from near its cycle high to nearing the low end of the prior 4-month range. The 10-year bond is now down 25 basis points from the high on March 13th.

I was surprised with the rise in yields up until March 13th as my beginning of the year expectation was for yields to fall moderately because I am bearish on economic growth. I also saw the large short position. If it unwound, there would be a huge rally in 10-year bonds. This potential rally is being realized, but as you can see in the chart below, the unwind is only in its early stages. There was a large trade which was bullish on growth in late-2016. It has been dubbed the Trump-trade. Yields increased, the dollar rallied, and stocks rallied. The current short positioning in the 10-year is the lowest since December 2nd. The Trump-trade in the 10-year bond has mainly unwound, but if the net positioning becomes long, treasuries will rally more. I think that’s the correct positioning because of the weak economic growth ahead.

Going into the year, the economy was weak, but fiscal stimulus expectations were high. Since then, the economy weakened and the chances of fiscal stimulus lowered. You would think fiscal stimulus would come faster with a weak economy, but the cracks aren’t noticeable unless you examine the economy closely. The labor market and the stock market are still strong. Surface level researchers will start to see cracks when the sub-2% GDP report is released in a few weeks. The rally in bonds is predicting a weak report.

The dollar is also falling in line with my beginning of the year prediction. I called it a bubble. Even though the Fed has been more hawkish than my expectation, the dollar index has still sold off. It’s down about three handles since the March 2nd high; it’s down about four handles from the December 28th cycle high. The fact that the dollar is selling off despite rate hikes is a powerful signal that traders are bearish on U.S. economic growth. The dollar rallied after the December rate hike because traders were looking at the strong sentiment data. Strong surveys didn’t turn into strong growth, so when the Fed raised rates again, the dollar fell. The dollar has given up half of its Trump rally. It signals the Fed should be done with its hiking in 2017. The current odds of the Fed maintaining rates in 2017 is 14.6%.

On the bright side, the dollar weakness is going to help international corporate earnings. The Trump trade unwinding is still bearish for risk assets like stocks, but improved earnings is a positive tailwind which will act as a counterweight. As you may have noticed, when reviewing the FactSet earnings expectations, I’ve moved to focusing on the aggregate earnings total forecasts instead of the growth percentage. This avoids getting bogged down with adjustments to prior earnings. I don’t care much about the changes to 2016 earnings; I care more about the changes to 2017 earnings estimates.

The title of last week’s article showed the S&P 500 earnings estimate for 2017 was $131.11. The most recent estimate for 2017 S&P 500 earnings fell slightly to $131.06. Earnings estimates for Q1 improved from $29.52 to $29.56. These are positive results as the estimates usually fall prior to earnings being reported so the estimates can be beaten. There’s always the possibility that even though estimates show a great quarter is coming, firms miss them. I can foresee estimates being beat by less than average, but since the economy hasn’t fallen off a cliff, I expect them to at least be met.

Energy 2017 earnings growth expectations fell again from last week’s 310.1% to 306.5%. Financials 2017 expected growth improved from 10.4% at the beginning of the quarter to now being expected to grow 11.9%. I think the estimates for financials are too high. The dollar and the 10-year bond are forecasting less than the expected two more rate hikes in 2017. This means net interest margins will expand less than expected. Added to this, loan growth is slowing. These are factors which will affect financials’ earnings later in the year which makes this quarter’s guidance the key factor to focus on. If the financials forecast weaker than expected earnings, they will fall when they report next month.


Monday was a critical day for the markets as bonds rallied and the dollar fell. It shows traders are not fully on board with the concept that fiscal stimulus will save the economy. The sentiment around the GOP’s ability to get fiscal stimulus done in 2017 has waned. Considering the size of the rally since December, I don’t think the 2.5% correction in the S&P 500 is large enough.

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