At this point, you should be well versed in what we mean when we talk about the “reflation trade” or the “Trump trade” as it were.
You should also be well aware of the fact that the reflation narrative markets adhered to from November 9 to December 30 revolves around higher yields and a stronger dollar.
When it comes to the S&P, a negative correlation between stock and bond returns and a positive correlation between equities and the dollar (combined with expectations of higher growth) fueled a rally that saw stocks close the year up sharply from their February lows.
By contrast, 2017 has been all about testing the reflation narrative. Here’s what Bloomberg’s Richard Breslow wrote earlier today:
Trends go through life cycles. There’s more to them than just a big move that happens because some market theme becomes all the rage. Enduring moves need to do more than cover a good deal of ground. They must endure through re-evaluations and tests of support. Even the best trend often bends. The question becomes, will it break?
Although Breslow contends that the reflation trend hasn’t truly bent let alone broken, one could certainly argue that when we look back later, the publication of Donald Trump’s comments about the “too strong” dollar on Tuesday might have marked the turning point.
And so, as you ponder whether the reflation story has run its course before Trump even takes office, consider the following chart which I’ve shown on too many occasions to count over the past week or so:
The bottom line: only one asset in the reflation trinity is still sticking largely to the script.