Wall Street traders have notoriously short attention spans, and it's showing in the latest round of whining, this time around the idea that the Donald Trump "reflation trade" is winding down.
It goes like this:
- Traders now realize that the Trump agenda — the tax cuts, fewer regulations, the infrastructure spending — are 2018 events for earnings.
- At current prices, this leaves stocks dangerously extended, because when you start trading on earnings that are one to two years out, you are in a very speculative market.
Here's a typical example of this kind of concern, coming from Cannacord Genuity: "Should February fail to bring a market pullback, we believe the odds of a bigger correction this spring will mount as the valuation of cyclical stocks prematurely overshoots."
The firm cited high investor complacency, a widening in credit spreads (particularly in Europe due to anti-globalism political developments), and another drop in China's foreign currency reserves, despite various capital controls. They argue that "the 'reflation trade' is tiring" and are neutral on stocks.
Really? It doesn't show up in the markets. A lot of people are confusing short-term trends with intermediate and longer-term trends.
It's true there has been some modest weakness this month. Crude is down. Bond yields are down. This has put some pressure on energy and bank stocks.