As Goldman noted last week, “following the election, the positive shift in sentiment among investors, business, and consumers suggested that the probability of tax cuts and easier regulation was seen to be higher than the probability of meaningful restrictions to trade and immigration.”
It seems that markets got it wrong.
It turns out that the probability of meaningful restrictions on trade and immigration was much higher than the probability of tax cuts and easier regulation (both of which are easy to talk about, but will take a while to implement – just like fiscal stimulus).
That pretty much sums up the apparent fading of the reflation trade, but in case you need a simpler guide, here’s Goldman on “why some Trump trades are fading.”
Via Goldman
- Inflation themes have rallied and remain close to post-election highs…
- …but growth themes are more ambiguous.
- The US economy is already close to full employment…
- …so the scope for growth is capped.
- While pro-growth policies could support a revival in productivity…
- …this outcome is speculative at best, and would take years to realize.
- Small business growth sentiment surged in November and December…
- …but hard data have been more subdued.
- Fund flows and household surveys suggest the surge in growth sentiment is probably peaking…
- …consistent with what growth-sensitive assets have been pricing.
