‘Trump trade’ turns to trepidation as investors unwind
NEW YORK (Reuters) – Investors were shelving rosy hopes for US tax reform and rethinking strategies premised on Donald Trump’s economic growth promises on Wednesday, as the president faced his loudest criticism yet over possible collusion between his election campaign and Russia.
From stocks to bonds to the US dollar, a bevy of trades that have been fashionable since Trump’s election last November were getting dialed back or in some cases shredded as his reform agenda looked increasingly vulnerable amid the fallout from his firing last week of James Comey, the director of the Federal Bureau of Investigation.
The uncertainty about Trump’s future increased over allegations he had sought to end Comey’s investigation into ties between the president’s first national security adviser, Michael Flynn, and Russia, and even some Republicans were now calling for a deeper probe into possible obstruction of justice.
The result was the harshest sell-off yet in US stocks since Trump was elected and a jettisoning of positions that were tied to the notion that his policies would stoke economic growth and inflation.
“The ‘Trump trade’ is over as of today,” said Ross Gerber, cofounder and CEO of Gerber Kawasaki Wealth and Investment Management, adding that they have been selling for the past 45 days and continued to be bearish on risky assets. “We’ve seen cracks all year, but today, this is the first institutional selling we are seeing.”
Indeed, some “Trump trades” have been unwinding for weeks, especially in the bond and currency markets where bets on inflation risks and economic growth prospects are most prevalent.
“This has created opportunities for investors,” said Richard Benson, the managing director and cohead of portfolio investments at Millennium Global Investments in London, who said they had been short US dollars against European currencies. “And right now, we’re looking at these opportunities.”
On Wednesday, one key indicator of the level of inflation five years from now fell to its lowest since late November. Meanwhile, the US dollar, which had surged more than 5% after Trump’s election, was effectively back to its Election Day level.
The real pain trade on Wednesday, though, was in stocks. Through the end of last week the S&P 500 stock index had gained more than 12% since Trump won the White House, and while the index has seen one other day since last November’s election in which it fell by more than 1.0%, Wednesday’s drop of 1.7% was its largest one-day fall in eight months.
“It doesn’t mean that institutions are saying: ‘Its time to leave the US,’ but for various reasons it’s time to go to the sidelines,” said Michael Purves, the chief global strategist at Weeden & Co.
Julian Emanuel, executive director of US equity and derivatives strategy at UBS Securities, said clients were “certainly concerned because it increases the uncertainty.”
With Washington policy makers distracted by Trump’s political problems, investors were betting on a longer timeline to get to tax reform.
“Immediately after the election, we asked our analysts to use lower forward-looking tax rates in their models, and now in the last couple of days I’m starting to think whether we should reverse that to assume the status quo for tax rates,” said Edward Perkin, the chief equity investment officer at Eaton Vance.
US House Speaker Paul Ryan said on Wednesday that Republicans were determined to keep pursuing tax reform, although such efforts could be seriously hampered. Democratic Congressman Jim Himes, a member of the House Intelligence Committee, told MSNBC that the “legislative agenda [was] lying in ruins.”
Investors have become increasingly bearish on US equities versus international assets in recent weeks, pulling a total of $11.2 billion from US-based domestic stock funds, according to Thomson Reuters Lipper data, and instead stampeding into US-based stock funds that invest in Europe.
“We have been contemplating an increase in international stocks to kind of hedge our US equity bet,” said Phil Blancato, the CEO of Ladenberg Thalmann Asset Management in New York. “So we are very much remodeling our portfolios.”
A longshot worry is the uncertainty that could be presented if Trump is actually impeached by the US Congress. A small but growing number of Trump’s fellow Republicans called for an independent probe of possible collusion between his 2016 campaign and Russia, and one mentioned impeachment.
Investors said that was not necessarily a market negative, if Vice President Mike Pence were to take over. “Policy-wise it might not make such a difference,” said Frances Hudson, a global thematic strategist at Standard Life Investments in Edinburgh, Scotland.