I generally don’t think I can beat the market, however, right now there is something, which worries me and that is that the “Trump rally” in the US stock market could be about to end.
It seems to me that what US stock market investors are really focusing on is the potential for deregulation and tax cuts (and infrastructure investments). And we might of course get that and deregulation and tax cuts and certainly should be welcomed news both for the US economy and the US stock markets.
But if you get supply side reforms then it will be because of the Republican majority in the House and the Senate (might) want this – not because of Trump. Trump continues to pay lip service to these ideas, but he has certainly not be consistent. There is nothing in Trump’s past that tell us that he is a “free market guy”.
Where he has been consistent – even very consistent – is on his protectionist message and his China bashing. Presently the markets are ignoring this and that might not be the wrong thing to do, but I must say Trump’s 35% tariff talk scares scares me a lot and so does his persistent attempt to “pick a fight” with China.
Another factor, which could spell the end of the “Trump rally” is that not only will the Federal Reserve hike interest rates next week, but the FOMC could also send a more hawkish signal than presently being priced by the market.
In this regard I would particularly focus on inflation expectations, which essentially have stopped rising since 5-year/5-year breakeven inflation expectations broke above 2% a couple of weeks ago. Meanwhile the US stock markets generally has continued to trade (moderately) higher. To me that there seems to be a bit of a disconnect.
Hence, investors expected some Trumpflation as long as (medium-term) inflation expectation, where below 2%, but from here on investors are likely to increasingly think that there will be full monetary offset of any “fiscal stimulus” from the Trump administration.