Trump can’t take credit for the Trump rally

Reuters/Carlo Allegri

The most notable moves in US markets since November 9 started before the election and likely won’t be sustained only by its outcome.

To recap, US stocks rose to all-time highs after President Donald Trump won the election. Treasury yields also rose, as it appeared that inflation may finally start to take off.

The narrative was that Trump, who had touted a pro-business platform, would have the support of a Republican Senate and House of Representatives to enact his tax reforms and infrastructure investments.

But Jonathan Golub, the chief equity strategist at RBC Capital, is among those analysts who argue that the preexisting economic backdrop was a bigger mover of markets and will remain the most important catalyst.

“Given our Street-high S&P 500 price target of 2500, it’s easy to assume that our call is a simply a play on President Trump’s pro-growth policies,” Golub said in a client note on Monday. “This is hardly the case. While we believe that market-friendly policy prescriptions have the potential to boost stock prices, we see reflation and a cyclically stronger economy as the more likely forces driving equities from here.”

Golub showed that incoming economic data had started to improve before the election:RBC Capital Markets

“In many ways, what Trump has gotten right, more than anything else, is timing,” Golub said, adding that Trump ran for president in the weakest year of the economic recovery.

“Growth and inflation expectations had already begun to renormalize around mid-year and incoming data began to turn higher just before Election Day.”

One of the standout moves after the election was a rise in market-based expectations for inflation. This showed in the rise of breakeven inflation — the difference between Treasury yields and their equivalents that are indexed to inflation.

Breakevens had also started rising before the election:

FRED

The chart below from Golub’s note shows that the equity and bond market performances post-election were not all that outsized compared to the preceding months:RBC Capital Markets

The market reaction “followed the typical trajectory around close presidential elections, pricing out the uncertainty risk premium rather than pricing in policy changes or stimulus; ditto for the move up in bond yields,” said Binky Chadha, Deutsche Bank’s chief global strategist, in a note on Thursday. In other words, investors hate uncertainty, and so they embraced Trump’s decisive electoral-college win, not all that he promised but had not yet delivered on.

“The post election ‘Trump rally’ has not reflected expectations of policy changes or stimulus,” he said.

Chadha published a 2017 S&P 500 target of 2,600, the highest among major Wall Street firms. He forecast a 15% gain for the year to be driven by share buybacks, economic growth, and higher corporate profits — all of which may or may not be driven by Trump’s policies.

“Put differently, pro-growth policies might be the icing on the cake, but a stronger backdrop is the cake,” Golub said.