The buoyancy of U.S. stocks in the wake of Donald Trump's U.S. presidential election victory was nothing but a "technical rally" and we would know soon whether equity markets can hold on to their gains, says the chairman of a Swiss financial advisory firm.
Beat Wittmann, partner and chairman at Porta Advisors, has recently reined in his long-held bullish views on equities, saying "staying defensive right now is the sensible thing to do."
According to Wittmann, cash may be a safer place to park assets for the time being, given the liquidity-fueled boom enjoyed by markets in recent years, combined with a lack of clarity over the possible implementation of a raft of populist policies proposed by Trump during the campaign.
While the Swiss investor says he is not worried over longer-term equity valuations and that he still believes stocks could be the asset class of choice over an extended horizon, he warns of a looming "paradigm shift".
In Wittmann's words,"After 30 years of lower inflation and interest rates, we are going to head for reflation. That will be a bumpy road and we'll see in the next few days and weeks how this U.S. administration is going to tie up on stimulating domestic demand and running foreign relationships."
While cautioning over the prospect of a near-term spike in volatility, Wittman repeated that more clarity on the situation should be with us soon.
"We don't have to wait for a long time, we will see in the next few weeks," he forecast.
Wittmann said it was crucial to understand who will be in Trump's team to determine the direction in which markets should go from here.
"I think what we have seen the last few days is simply a technical rally. People were either wrongly positioned or not positioned at all and there is always patriotism at work. I want to see who gets nominated to this cabinet and that will largely determine the priorities," he summarized.
The money pumped into stock markets in the days following the election closely tracked the sectors and firms seen to be beneficiaries from policies espoused by Trump during the campaign. Key sectors enjoying momentum included those related to construction and infrastructure with expectations high for Trump to focus on actions to stimulate building demand.
However, in a note published Friday, analysts at investment bank Goldman Sachs said the associated rally in metals and bulk commodities had got ahead of itself as the actual impact of any potential spending was dwarfed by the impact of China on the base metals market.
Similarly, Wittmann says the sharp lift in financial stocks since last Wednesday was unjustified by the limited information we have about the Trump effect on the sector.
While applauding Trump's "pragmatism" he added that it was the details which were going to matter.
Pointing to the lack of clarity over the President-elect's plans for banks, Wittmann noted that Trump's pledge to remove or water down the strict Dodd-Frank regulatory oversight laws introduced after the financial crisis could be very beneficial for them.
However, the Republican's comments about reinstating the Glass-Steagall Act, which separated investment banking from commercial banking operations from 1933 until it was repealed in 1999, could have the opposite effect.
"One thing is very kind of positive for the financial sector…the other would break up universal banks as we know them…It's 50/50," Wittmann concluded.