“Way” back on Thursday, we showed you the following chart which we (only half) jokingly suggested may portend trouble ahead for high flying equities trading at absurd multiples:
(Bloomberg)
Obviously there’s considerable debate around using news-based indicators to draw conclusions about markets, but we would note that geopolitical turmoil both at home and abroad has led directly to increased interest in the now ubiquitous Economic Policy Uncertainty Index.
Ultimately, what the media prints and, in turn, what people read shapes investor psychology. It’s probably fair to say that plastering “Dow Hits 20,000” all over the front pages of national newspapers helped accelerate inflows into popular retail equity vehicles like SPY earlier this year.
All of this becomes especially relevant when the market is being driven overwhelmingly by a specific narrative that lends itself to blanket coverage. That narrative – as indicated by the chart above – is the “reflation” meme or, alternatively, the “Trump trade.”
As regular readers are no doubt aware, faith in this narrative is in the driver’s seat in terms of pushing around the dollar, yields, and ultimately stocks. And it’s not just the “dumb” money. Have a look at the CFTC data for proof that the “pros” are buying it too.
Finally, note this is why the GOP health care bill is such a big deal for markets. If it gets through quickly, it sets the stage for tax reform. If not, tax reform gets delayed.
With that in mind, consider the following chart via Michael McDonough:
