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Reflation trade took its first hit, is Trumps’ honeymoon over?

Article by ForexTime

U.S. equities suffered their worst weekly performance since the U.S. election back in November. The S&P 500 declined 1.44%, the Dow Jones industrial average lost 318 points, and the heavy tech Nasdaq index fell 1.22%.
The fall in equities was largely attributed to the failure of Trump’s first test when his own party leaders pulled legislation to replace Obamacare. The lesson learned last week is that a Congress controlled by the Republicans doesn’t necessarily mean the President will be able to pass laws, and his art of negotiation may work in business deals, but unfortunately for him, politics is going to be a different type of game that requires a different form of art.
Although investors didn’t like the news, markets quickly managed to recover most of their losses on Friday after Trump signaled they would move on to the next phase, which is cutting taxes, the key contributor to the market’s rally.
I believe that few knew replacing the health care would be this complicated, and it’s becoming more apparent that tax reforms and fiscal stimulus won’t be any easier, especially that many Republicans don’t support massive deficits.  Given that investors have been pricing in the expected changes in fiscal policies for almost five months, I find it somehow difficult to keep buying into this market based only on promises.
Investors might begin reassessing their positions, and for those who were completely ignoring market valuations, should reconsider looking at some important metrics. Most valuation metrics are indicating overstretched prices, whether it is P/E, Price/Book, Free cash flow yield, cyclically adjusted P/E, and the list goes on. However, in a momentum trade, driven by very optimistic expectations very few care about current valuations. But if you believe that Trump’s honeymoon is over and last week’s experience is just a guide on what to expect next, I believe markets will sell off sharply, probably up to 10% correction.
The VIX index sent its first warning signal on Friday, jumping above 14 for the first time in 2017. Meanwhile, the fall in U.S. Treasury yields are also indicating that many investors wanted to be in a safe place. I’ll be mostly worried on the financial sector, which is likely to take the biggest hit in case of a market correction. So be prepared for a bumpy road ahead, and make sure you fasten your seatbelts.

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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About Louie Lewis

Louie Lewis
Successful forex trading starts with you first. Then comes the actual strategies and techniques. I have been involved with forex and forex trading for a few years now. It is a wonderful way to build wealth. The learning never stops and I want to help others along their journey into this wonderful market of opportunity.

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