Goldman Sachs Says Trump Rally Has Been CurbedBy
Cooling sentiment visible in surveys, fund flows, price action
Recommends clients stay long U.S. break-even inflation
Trump-fueled enthusiasm is running out.
Hopes for a pro-growth suite of fiscal policies under President Donald Trump buoyed financial markets after Nov. 8, sparking a rise in measures of consumer and business confidence that sent the gap between these "soft" data and measures of real economic activity to its widest level in six years.
This exuberance is probably peaking, writes Charles Himmelberg, Goldman Sachs Group Inc.’s chief credit strategist, who cites several signs of cooling sentiment:
- The Conference Board’s measure of consumer expectations for the U.S. economy over the next six months fell to 99.8 in January from 106.4 the prior month, registering its steepest decline in more than a year.
- Retail investors’ preference for stocks over bonds after the election has almost fully reversed, according to Himmelberg, with the four-week trend for mutual-fund flows into U.S. bond funds hitting a six-month high.
- The post-election outperformance of Goldman’s "cyclicals versus defensive" basket of stocks has ceased; it now trails the S&P 500 index’s advance since the election.
- The yield on 10-year Treasury Inflation Protected Securities jumped nearly 60 basis points in the five weeks following Nov. 8, but has since pared nearly half of that move.
"The risk for markets, ironically, may be the strength of recent macroeconomic data, which may have encouraged markets to price a more sustained improvement in GDP growth than we think likely," adds Himmelberg.
The upshot is that the market increasingly believes Trump’s policies will do more to stoke inflation than buoy growth in the short run.
Jan Hatzius, Goldman’s chief economist, noted separately that immigration restrictions could serve as a meaningful offset to any boost to productive capacity linked to infrastructure spending, tax reform and deregulation that could be achieved over the long haul. Net migration contributes up to one quarter of the U.S. economy’s 1.75 percent potential growth rate, he estimates.
Higher demand and curtailed supply are a recipe for increasing price pressures.
Amid this backdrop, Himmelberg’s doubling down on one of Goldman’s top trades: U.S. 10-year break-even inflation rate -- which is derived from the spread between the yield on Treasuries and their inflation-protected brethren -- to 2.3 percent. It’s at about 2.03 percent now.
"For the first time in this expansion, we suspect markets will soon be discovering and digesting a mix of low growth, rising inflation and tighter monetary policy," concludes the strategist.