Santoli: Trump makes market interesting again with new narrative for bulls to believe in

Published Sun, Nov 13 201610:34 PM EST

The election authored a new bullish story for stocks. The dust-jacket summary goes like this: "Donald Trump has led a Republican takeover of Washington, which opens a clear path to a quick deregulation push, dramatic tax cuts for upper-income households and companies, and a debt-enabled infrastructure binge. Buy industrial, financial and healthcare stocks, and sell your bonds." Investors caught flat-footed by the vote rushed to buy into the narrative, as the market launched a violent repositioning along several axes: from safe, stable stocks to cyclical, risky ones; from over-owned bellwethers to neglected also-rans; from low-growth/deflation hedges to reflation/inflation plays. Now the crucial question is whether this story can be believed - at least in the uncomplicated version reflected in the first three days of trading under President-elect Trump? No doubt jarred by the unanticipated surge in stocks and selloff in bonds after the reflex 5 percent selloff Tuesday night, market commentators are grasping for metaphors to characterize the new regime. Eric Peters, chief investment officer of alternative-investing firm One River Asset Management, cited investors likening the Trump win to the ascendance of Haruhiko Kuroda at the Bank of Japan or Mario Draghi at the European Central Bank. These shifts immediately altered the equation for monetary policy and markets rushed to account for the radical shift. A more common association has been made with Ronald Reagan's election in 1980, though the profile of the new president and the vastly different economic and market backdrop today severely limit the effectiveness of this comparison. Stocks valuations were painfully low, interest rates crushingly high and monetary policy tight then, the virtual opposite of today. Still, billionaire investors who were previously frustrated with the central-bank-driven markets of recent years quickly struck a hopeful stance on Wednesday. These include Stanley Druckenmiller, Carl Icahn, and Canada's Prem Watsa of Fairfax Financial who each said they had sold gold and Treasuries, taken off downside stock hedges or bought shares outright. The markets' breakneck re-pricing of fiscal policy, growth potential and inflation is more familiar and comfortable to many investors who came of age in the '70s and '80s, when these forces allowed the Big Money to lay bets on one sector over another and to handicap the interplay of the economic cycle and Fed policy. Last week's stark rotation from bonds to stocks and from defensive to offensive sectors felt like old times to this crowd. But are the markets effectively acting as if a Trump administration will keep all the promises investors like (fiscal stimulus, de-regulation) while diluting or leaving aside the ones they fear (protectionist trade frictions, a purge of undocumented immigrants)? Some of the chatter out of Wall Street made this wishful evaluation explicit. Credit Suisse strategist Andrew Garthwaite wrote, "Most of Trump's more troubling policies (on immigration, protectionism) are likely to be toned down, and some of his policies can be seen as positive for equities (more fiscal spending and a cut in the corporate tax rate)." At minimum, the market seems to be rewarding the assumed "Trump beneficiaries" far more than it's punishing the possible victims. Just a few Dow Jones Industrial Average stocks illustrate this. Caterpillar surged 10.4 percent in the three days after the election, adding $5.1 billion in market value. The stock trades at 1.3-times revenue, so that increase implies nearly $4 billion in incremental sales due to the flush of infrastructure spending. That's an awful lot of bull dozers, even to build a big wall. Goldman Sachs jumped more than 12 percent post-election, as hopes of dramatic regulatory relief and higher interest rates banished any thought that a firm Trump sought to link tightly to Hillary Clinton would have its fortunes crimped. On the losing side, Coca-Cola and Procter & Gamble slipped slightly, as money flowed out of the safer staples stocks and the rising dollar pressured export-centric companies. Picking apart the market response is a bit complicated by the fact that the market entered last week a bit oversold and looked to be pulling back into gear for a rally attempt into year-end regardless of the election effect. I made that case a week ago, and also noted that recently the "offensive" parts of the market had been holding their own as the tape slid sideways since late summer. Bespoke Investment Group notes that the S & P 500 bounced off its 200-day average Monday, which during this bull market has been a green light for buyers to get more aggressive. Clearly, investors were under-invested and over-hedged. Now, the rally is sparking not only the impulse to participate in a stronger market but an embrace of the quickly scribbled "Trumponimics" story line that can give cohesion to percolating animal spirits. It's not hard to see how a guns-and-butter fiscal policy that flushes cash into domestic projects and the pockets of the owners of capital could energize a market that has mostly been sideways for a year and a half. And as bonds sell off, this could serve at long last as a catalyst for money shuttling from fixed-income into stocks by late-coming small investors who have fought this bull market for years. Technical analysts generally approve of this market revival led by growth-geared sectors, and think stocks should enjoy an upward bias into year-end. A steeper Treasury yield curve, with the 10-year yield slicing above 2.1 percent with ease last week, seems to give wider clearance to the Fed to bump short-term rates up in December, too. The territory between deflation risk and worrisome inflation – where we seem to be now – can be good for risky assets. All sounds pretty favorable, but it seems best to view the economy and markets under Trump as "high-beta" items, meaning they will operate in a wider band of volatility – with both upside and downside risks amplified. Last week markets front-loaded some of the possible good effects. Chances are, we'll be susceptible to headlines and tweets that stir concerns about the potential pitfalls too. Like what? -Tax cuts and heavy new infrastructure spending will be hitting an economy already seven years into an expansion, with 4.9 percent unemployment and wages already starting to climb. We could be hearing about an economy "overheating," inflation accelerating and a Fed "behind the curve" before we know it. And will a President Trump continue to take the Fed to task? -A surging dollar has checked global growth several times in recent years, and is already pressuring emerging markets. Can China keep running its stimulus flat out to offset these effects? To what effect on global financial stability? -Will strict immigration enforcement start to seem like a new burden on businesses, while exacerbating pockets of labor scarcity? -Trade wars aren't usually taken in stride by big investors and CEOs, who are globalists by vocation and, often, avocation. -European national elections could soon empower EU skeptics and get the Euro breakup theme started again. None of this might matter soon, or ever. But it's a fair bet that a volatile campaign and choppy transition in Washington will give way to a "high-beta" presidency

Senate Majority Leader Mitch McConnell (R-KY), left, walks with President-elect Donald Trump, center, and Trump's wife Melania, second right, before a meeting at The Capitol Building on November 10.

Zach Gibson | Getty Images

The election authored a new bullish story for stocks.

The dust-jacket summary goes like this: "Donald Trump has led a Republican takeover of Washington, which opens a clear path to a quick deregulation push, dramatic tax cuts for upper-income households and companies, and a debt-enabled infrastructure binge. Buy industrial, financial and healthcare stocks, and sell your bonds."

Investors caught flat-footed by the vote rushed to buy into the narrative, as the market launched a violent repositioning along several axes: from safe, stable stocks to cyclical, risky ones; from over-owned bellwethers to neglected also-rans; from low-growth/deflation hedges to reflation/inflation plays.

Now the crucial question is whether this story can be believed - at least in the uncomplicated version reflected in the first three days of trading under President-elect Trump?

No doubt jarred by the unanticipated surge in stocks and selloff in bonds after the reflex 5 percent selloff Tuesday night, market commentators are grasping for metaphors to characterize the new regime.

Eric Peters, chief investment officer of alternative-investing firm One River Asset Management, cited investors likening the Trump win to the ascendance of Haruhiko Kuroda at the Bank of Japan or Mario Draghi at the European Central Bank. These shifts immediately altered the equation for monetary policy and markets rushed to account for the radical shift.

A more common association has been made with Ronald Reagan's election in 1980, though the profile of the new president and the vastly different economic and market backdrop today severely limit the effectiveness of this comparison. Stocks valuations were painfully low, interest rates crushingly high and monetary policy tight then, the virtual opposite of today.

Still, billionaire investors who were previously frustrated with the central-bank-driven markets of recent years quickly struck a hopeful stance on Wednesday. These include Stanley Druckenmiller, Carl Icahn, and Canada's Prem Watsa of Fairfax Financial who each said they had sold gold and Treasuries, taken off downside stock hedges or bought shares outright.

The markets' breakneck re-pricing of fiscal policy, growth potential and inflation is more familiar and comfortable to many investors who came of age in the '70s and '80s, when these forces allowed the Big Money to lay bets on one sector over another and to handicap the interplay of the economic cycle and Fed policy. Last week's stark rotation from bonds to stocks and from defensive to offensive sectors felt like old times to this crowd.