On Friday morning , the S&P500 was exactly where it was on the night of Trump's election, while Nasdaq and Russell 2000 were at even lower levels. The new US equity bull market which was forecasted to be propelled to sky-high levels on November 6th has now evaporated and most Trump trades have been crashing back to earth. To be fair, we were one of the few who voiced their skepticism with regard to the immediate surge in US equities, those early days. This is, of course, not to say that a bear market was or is our base case scenario, but we had trouble seeing how an already expensive market can move significantly upward, considering Trump's policies and unpredictability could produce any outcome , from the very best to the very worst. The market looked willing to asume only the perfect-world scenario, but it is now having second thoughts.
New, more serious risks have emerged. Our initial concern was the potential negative impact of his three-pillar policy (tariffs, tax cuts and deregulation) on inflation and the twin deficits. But the first two months of the new adminsitration have shown that the US is sliding into a slippery slope. The dogma "might-is-right" will result into bullying the perceived weaker players to make advantageous deals, threatening to severe US ties with allies, international businesses and global consumers. Democracy itself is at risk, as Trump has already mentioned several times ("jokingly") that he would love to have a third term as President. His public desire to annex Panama and Canada, to occupy Greenland, to buy Gaza and turn it into a resort, his rush to become Putin's ally and supporter cannot be attributed to "just joking". Investors are paying close attention to these developments and do not seem to like them.
We fear that the Trump administration's arrogance and bullying attitude would eventually trigger a backlash from consumers, businesses and allies and isolate the US, both economically and geopolitically. Trump believes that the US can abandon its relations with Europe, because it has "a beautiful ocean as a separation", as per Trump's words. But now wars involve space and cyberspace, so physical distance offers even less protection than it did in 1941, when Japan attacked Pearl Harbor and pushed the US into the second world war. And last but not least, the US still needs its European airbases or its intercontinential missile-tracking stations based in Canada, to mention the least.
The world watched with awe last week the US siding with Russia and N. Korea against Ukraine and Europe, during the United Nations deliberations. Friday's debacle with Ukraine's Zelensky and his unprecedent humiliation in the oval office was just the cherry on the pie. The Economist in its recent cover story made an analogy of Don(ald) Trump to Don Corleone, a mafia-type leader who is blackmailing, bullying people and countries, in order to achieve yet another deal, to his own advantage. "But during dangerous times, friends, credibility and rules are worth more than a quick buck", to quote the UK publisher. We do hope that the US Congress, the financial markets and voters could push against Trump's agenda. But we should also be prepared for a lawless environment with unknown consequences for the US and the world.
It is really no surprise that February consumer confidence plunged to a 10-month low , just two months after hitting a multi-year high. It is no surprise that just two months into the new year there is currently little talk about the "animal spirits" that would be unleashed and power the US and its financial markets to new highs. Atlanta FED's GDPnow model is now projecting a negative Q1 GDP number (-1.5%), down from +2.3% of its previous forecast. Initial jobless claims jumped to 242k last week, worse than expected, and the next unemployment data might start showing the effect of federal employees being fired. The remaining will still have to reply to Musk's email "what did you do last week?" ...
Equities consequently corrected, as all this was too much to digest. The Nasdaq composite lost almost 4% and touched the significant 200-day moving average, off of which it rebounded on Friday. Interestingly, many sectors finished with strong gains, such as Financials (+2.8%) and Healthcare (+1.7%), while Staples (+1%) posted decent gains too. Europe was mixed, with EuroStoxx50 marginally lower (-0.2%) despite Trump's announcement that tariffs are coming for EU imports , while Germany (+1.2%), the UK (+1.7%) and Switzerland (+0.4%) were the bright spots. Europe suddenly appears to be a "safe haven", in stark contrast to the market's sentiment during the first days after Trump' election.
The January PCE Deflator (the FED's official inflation metric) fell to 2.5% in line with consensus. As a reminder the PCE hit a low of 2.1% in September, very close to the FED's target of 2%, but has been moving upward since then. Still, it is forecasted to slow down again in the next two-three months closer to 2.2%, especially considering the fact that personal consumption seems to be weakening faster than expected (-0.5% in January vs expectations of -0.1%). Core PCE was also in-line with expectations moving down to 2.6%.
Bonds continued to rally, especially in the US. The equity correction, the geopolitical turmoil as well as the weak macro data brought the US 10-year yield to a low of 4.19%, a tad higher than the 4.17% level right before Trump's election. The German equivalent also moved lower to 2.40%, close to this year's low. These moves have confirmed, for now, our view that the back-up in yields in early February were to be bought.
Chart of the Week : European outperformance continued strong inIFebruary.
A rare phenomenon occured in February, with US main equity indices losing ground, but European bourses cruising higher. Usually a European outperformance comes either with a stronger rally than its US peers or falling less than them, but such a divergence as it took place in February is rather odd. However, this is not really the case when someone digs deeper. It is such the weight of Technology and of specific names (Nvidia, Tesla, Microsoft) in the S&P500 that their recent rather lousy performance has had a big impact on the index level. If we consider the US sector performance, we find that more than half of them were actually positive for the month, with Staples (+5%), Energy (+3.8%) and Utilities (+1.5%) topping the list. On a year-to-date basis, the S&P500 is now negative (1.5%) whereas the equal weight index is up by more than 2.5%. The rotation out of Tech-related names appears to have more room to run and Hang Seng is powering ahead, as it did during Trump's first year in office in 2017. Of course we still have 10 more months to see what finally happens.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
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• Sources: Chart of the Week : KSH/Factset
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