The Trump Trade Looks Like a Trap

The US earnings season may very well prove decent, but that’s no guarantee that stocks will bounce back from their recent slump. The election of Donald Trump has triggered a combination of idiosyncratic sector selloffs with bond-market volatility that’s going to be hard for investors in the S&P 500 Index to escape. It will probably take signs of tariff policy moderation and a commitment to sustainable deficits to turn the stock market around. Investors should spend at least as much time watching the start of cabinet confirmation hearings this week as fourth-quarter results.

Policy speculation has seen the Trump trade dominate equity markets since the November election — sometimes for better and, lately, often for worse. First, Trump is proposing a combination of tariffs, tax cuts and immigration restrictions that have pushed consumer inflation expectations higher and prompted bond traders to entertain the possibility that the Federal Reserve may have already finished cutting policy rates. There have been other factors as well — namely, stubborn inflation data, rising energy prices and an unexpectedly strong labor market — but it would be hard to deny that Trump’s agenda has been a driving force behind higher yields. If he follows through on all his tax cut promises, higher-than-expected Treasury supply would be the icing on the policy-uncertainty cake.