Anyone who has a minimum of mountain experience knows that when you go out for an excursion in the morning it's a good idea to take your anorak with you even if the sky is clear and it's hot. In fact, above certain heights the weather conditions can change radically suddenly, with wind, rain, fog and cold taking the place of the sun in just a few minutes. At the lofty heights in which stock markets find themselves, particularly in America, swings in mood can be just as fast and corrections can be profound.
The Trump rally had and has some basic premises. The first is that Trump remains president. The second is that he succeeds in carrying out the promised reforms, in particular deregulation and the lowering of corporate taxes. Up until a week ago, the market, unlike the media and some commentators, did not express any doubts about either the first or the second premise. The Trump rally was corroded at the margins and we thus saw the dollar downsize and long Treasuries held up very well despite the rate hike anticipated in March.
The hard core of the Trump trade, the rise in the stock market, has however resisted, always until a week ago, any type of attack and has shown itself to be indestructible. Then, within days, Trump appeared weakened on several fronts. He seemed incapable of responding adequately to the powerful democratic attack (Russiagate and unprecedented obstruction of appointments) which aims in perspective at the big target of impeachment. He seemed to be an unwise tactician in having prioritized healthcare reform, which is of great interest to public opinion but little to the markets, for which it is only a dangerous mishap that pushes forward the timing of tax cuts. And finally, he seemed unable to perform the miracle of keeping his own party united and making it digest the health care reform.
And so a bag that seemed satisfied, calm and confident paid for the still acceptable stability of the index (we are only 2 percent below the highs and still 5 percent above the level at the beginning of the year and 12 percent above the lows election night) with a violent internal rotation, which saw banks and cyclicals lose 10 per cent from the highs and defensives recover much of the ground they had lost since November.
The reverse Trump rally, the deflation of everything that has happened since November and the return to October market values, if not worse, is therefore probably close to its conclusion. Failure to approve the health care reform will still cause discontent for a few days, but mitigated by the certainty that Congress will work on the tax authorities as early as next week.
However, the story will bequeath an important lesson for the markets and that is that the times of reality are much slower than those of fantasy. From November to February, the world discounted the full implementation of Trump's program without much concern that the concrete realization will still take a year. A year is a long time to go by and it has time to wear down the optimists in anticipation and encourage the pessimists. The good news, then, is that markets will hold.
The less good news is that the reforms will take a long time to implement and that the bar to overcome for new increases will be high. We will need a tax reform that is not too watered down, a good performance of the economy (which at the moment is not brilliant in America), growing profits not only due to the lower taxes to be paid and a Fed that raises rates in an orderly manner and without exaggeration. It's time to refocus your portfolio strategy. From the war of movement we are about to move to the war of position. This does not mean at all that the opportunities are all behind us. However, an American side exchange will allow the rest of the world to narrow the valuation gap and catch up
