History suggests Trump month will be stocks down, dollar up
LONDON (Reuters) – For financial markets, the Trump era begins on Monday, and if history is any guide, the following month should be a rocky one for Wall Street but positive for the dollar.
The S&P 500 has fallen a median 2.7% in the month after each new president has taken the keys to the White House since Herbert Hoover did so in January 1929, according to a Reuters analysis.
Only four presidents have seen Wall Street rise in their first month in power: Hoover (3.8%), John F. Kennedy in 1961 (6%), George H. W. Bush in 1989 (5.3%) and Bill Clinton in 1993 (0.8%).
The market has fallen in the first month under every other incoming president since Hoover. Even Ronald Reagan and Barack Obama, who ultimately presided over 120% and 165% rallies on Wall Street during their two terms, respectively, saw initial slides of 4.8% and 15%.
The dollar tends to fare better. Analysis going back to the early 1970s, when the currency was taken off the gold standard, shows it has risen an average 2.2% in the first month of a first-time president.
Donald Trump takes office as the 45th president of the United States with investor apprehension over an incoming president that has rarely been higher.
“There are two sides to Trump: the one side focusing on US stimulus, which drives up global growth; and the other side, the protectionist Donald Trump that could do the opposite. So the big question is which will we get?” State Street Global Advisors EMEA head of currencies James Binny said.
After Trump won the November election, markets latched onto his reflationary and pro-growth stance: Stocks rose to new highs, the bond sell-off deepened, and the dollar clocked a 14-year peak against the euro.
But as the inauguration drew closer, that momentum faded. Last week, the Dow Jones and dollar hit six-week lows, the 10-year US Treasury yield dropped to its lowest since late November, and gold rose to its highest in two months.
Some investors are playing it safe.
“We are neutral because we don’t know exactly what direction Trump will take,” said Lukas Daadler, the chief investment officer of investment solutions at Robeco, a subsidiary of Robeco Group. The latter has €269 billion in assets under management. “There is some extreme positioning out there, so there’s the risk of a short squeeze. But we’ve taken a neutral stance, and we might see more detail on his plans [this] week.”
Much of that positioning is in the US bond market and the dollar. Speculators have amassed record bets against 10-year Treasuries. According to Bank of America Merrill Lynch’s January fund-manager survey, the most overcrowded trade in the world now is the pro-dollar trade.
BAML strategists said on Friday that although there has been a clear cooling of “Trump trade” bets in recent weeks, overall investor sentiment is its highest in three months.
They recommend sticking with they call the “Icarus trade” – one last 10% rise in stocks and commodities before the rally ends.