Last week, the narrative cracked.
To be sure, anyone who pays attention to this sh*t on a daily basis already knew that the whole reflation meme that’s propped up stocks since the election had come under pressure on several occasions in 2017. Most notably i) the Friday before Trump’s speech to Congress when 10Y yields hit YTD lows and stocks looked wobbly and ii) earlier this month when the bottom fell out for crude inflicting further damage on an already beleaguered commodities complex.
But last Tuesday, the home gamers whose money has flowed into equities this year through popular retail vehicles like SPY learned that even in Trumplandia, stocks can go down as well as up.
Then, on Friday, everyone learned that not only is Donald Trump not one of the world’s preeminent deal makers, he in fact is a horrible negotiator and knows next to nothing about how Washington works (that whole “I’m an outsider and proud of it” thing came back to bite the President on the ass at a critical juncture). That served to further shake confidence and perhaps for the first time, retail investors were able to connect the dots. No “repeal and replace” means no tax reform and makes fiscal stimulus seem even more distant than it already appeared. That means the underlying narrative for buoyant equities no longer made much sense
And while this wasn’t reflected in the price action on Friday (see more on this from Richard Breslow out earlier this morning), another former FX trader thinks it probably will be this week. More from Mark Cudmore below.
U.S. Equities Face a Tough Week as the Love Has Gone
- While there’s no need to overreact to the Trump administration’s very public failure to reform health care, the evidence suggests that the marginal U.S. stock trader will be selling rather than buying this week
- Even if this wasn’t the key economic policy that equity investors were betting on, the failure is negative in two ways: his perceived ability to press through stimulus has been undermined, and he has even less fiscal ammunition now without health-sector cuts
- The reflation trade isn’t just being undermined from within the U.S. The pronounced slump in global commodity prices is much more damaging. And the U.K. triggering of Article 50 this week will create more negative headlines globally
- The volume-weighted average price for the S&P 500 Index in 2017 is 2321.9 — less than 1% below where the gauge finished Friday. That means that below that price, the average long from this year is offside. And we’re likely to get there soon since those that are still onside will want to lock-in some profit before quarter-end
- As I argued in this column Thursday, the bullish U.S. equity trade was psychologically broken last week. This is not about being structurally bearish –- it’s about a lack of incentives to attract fresh cash in the short term
- The love has faded. It can be rekindled in a couple of months’ time, but most likely at much lower prices