Trump’s agenda no longer priced into the market
Stocks that took off following Trump’s election have fallen back to pre-election levels
Goldman Sachs outlined their revised expectations for the success of US economic policy at the end of difficult week for Trump in a research report last Friday.
“Recent developments regarding the investigation into the Trump campaign have further weighed on a fiscal policy process that was already bogged down by House passage of the AHCA, which will consume valuable time in the Senate, an uncertain outcome on the FY18 budget resolution, without which tax legislation would become much less likely, and a lack of clear forward movement on tax reform.”
“Exhibit 3 presents four measures that likely reflect policy expectations: the relative performance of baskets of high-tax stocks (upper left panel) and infrastructure stocks (upper right panel) versus the S&P, constructed by our portfolio strategists; the outperformance of an index of bank stocks versus a model constructed by our equity options research team (lower left panel), and 5-year,5-year forward inflation (lower right panel).
“The first three represent reflect declining expectations of fairly specific policies. The decline in 5-year, 5-year forward breakeven inflation expectations suggests that the market may have now mostly priced out expectations of the broader macroeconomic effects of the Trump agenda as well. In each case, these measures are just above or below their level on Election Day.
“This suggests that while the probability of a meaningful tax cut by 2018 has diminished, there is limited risk of policy disappointment given such low expectations.”