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Mr Market learning to tell Trump’s bark from his bite

Nobody should ever attempt to judge an investment over a period of just 100 days. It is far too short a time to assess the quality of performance and far too prone to random effects. And in any case, most of us need results over very much more than 100 days.

It is therefore a little random to be judging the Trump presidency’s impact on investors after only 100 days. Add to this that the impact of a president over securities prices is limited (he is much less important than the chair of the Federal Reserve) and only comes with a lag, and the exercise seems even sillier.

Finally, note that as in all investments, the opening price is crucial. Judged by the stock market, Barack Obama was arguably the greatest president ever but that had everything to do with his taking office near the bottom of a bear market.

All these caveats out of the way, it is still intriguing to look at the first 100 days. Presidential political capital is greatest within the first 100 days, and that arbitrary number has been important ever since Franklin D Roosevelt set his stall by his first 100 days in 1933.

As markets try to discount future developments, and those predictions are made by people with money on the line, they give us a good idea of where the presidency might be heading.

Further, this new presidency came with an unmistakable “Trump trade”. Some months before election day, global markets had begun to move towards the possibility a “reflation trade” — in which economic growth picked up, bringing with it a small but healthy dose of inflation. The small hours of November 9 saw a sell-off followed by an epic rebound that carried on for a month. Now that Mr Trump has had the customary 100 days to frame his presidency, in what state is the Trump trade?

First, and most important, it is hard to say that there has been a wholesale retreat from optimism. The most basic gauge of faith in reflation is the relative performance of stocks and bonds. When stocks are beating bonds, the reflation trade is on. And they are. The S&P 500 beat 10-year Treasury bonds by 15 percentage points between election and inauguration. Since then, it has gained by another three percentage points. There has not been a wholesale reversal.

Second, the perception of how reflation will play out geographically has altered. Normally, optimism about growth would help emerging markets, leveraged plays on global growth, to outperform. Instead, emerging market assets tanked after the election, presumably on the fear that Mr Trump meant what he said about trade wars with China, and renegotiating the Nafta agreement with Canada and Mexico.

Since January, this trade has reversed in its entirety. Investors now believe that whatever Mr Trump does to stimulate the US economy will be even more beneficial for emerging markets. The confusion in the last week over whether the administration really has plans to leave Nafta altogether created only a brief sell-off in the Mexican peso.

Other indicators suggest that excitement has dwindled significantly. Goldman Sachs data shows that the 50 companies in the S&P 500 with the highest effective tax rates — which stood to benefit most from a tax cut — outperformed the 50 with the lowest tax rates in the two months after the election. But now that has switched completely. Low-tax companies have outperformed. The healthcare reform debacle was taken to show that major tax reform was now unlikely.

Within sectors, the best performers since the election have been financials, buoyed both by a belief in reflation (which raises interest rates and helps their profit margins), while since the inauguration technology has taken the lead. Technology companies are showing robust earnings growth and a perception that growth might be in short supply encourages investors to pay more for them. The same is true of the recent significant outperformance of value stocks (which look cheap) by growth stocks (that can demonstrate that they are growing).

As for banks, they have been little affected thus far by proposals to look at reintroducing the “Glass-Steagall” division between investment and commercial banks. As this makes great sense for people across the US political spectrum, this may be unwise.

What the first 100 days suggests, then, is that optimism is dissipating for the kind of changes a Trump presidency can unleash. But the market also appears impervious to Mr Trump’s pronouncements on Twitter and to erratic swings in policy. In short, traders can now tell the bark from the bite. They can tune out the noise and still believe that the signal will allow companies — and the economy — to stay on an even keel.

The market’s judgment remains that Mr Trump will do no harm and not obstruct progress that is being made. The underlying progress is real (or so Mr Market thinks). Not messing up a decent inheritance is harder than it appears. It would be a real achievement. Let us hope the market is right.

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