Markets are signaling caution after investors greeted President Donald Trump’s election with enthusiasm.
Bets on higher economic growth, inflation and interest rates — which became known as the “reflation trade” — have eased since the election. The yield on the 10-year Treasury note is lower than it was when Mr. Trump took office, including a decline Wednesday after the White House unveiled its tax proposal. The U.S. dollar has retreated from a 14-year high hit after the election.
Many popular postelection wagers took a hit last month after Republicans failed to repeal and replace the Affordable Care Act, which highlighted the difficulties they could face advancing new legislation even while holding the White House and both houses of Congress.
As hopes for swift enactment of business-friendly tax cuts, regulatory rollbacks and infrastructure spending have waned, investors have dialed back on stocks that were expected to benefit from such shifts, like bank and industrial shares. They have poured money into companies that have generally served up better-than-average returns since the financial crisis, such as large technology companies.
Strong earnings reports from bellwether companies including McDonald’s Corp. and Caterpillar Inc. helped stocks rally broadly this week, propelling the tech-heavy Nasdaq Composite past 6000 for the first time.
“People will ultimately look through that stuff and focus on reality, and the reality is we’re on a pretty significant upswing when it comes to earnings data,” said Nathan Thooft, co-head of global asset allocation at Manulife Asset Management. “On top of that, we have a very supportive economic backdrop.”
Other moves have reversed course. The yield on the benchmark 10-year U.S. Treasury note remains above its Election Day level of 1.867%, yet has fallen to 2.291% from 2.466% on Jan. 20. The WSJ Dollar Index, which measures the U.S. currency against 16 others, is above where it was on Nov. 8 but has fallen roughly 2% since inauguration.
Few money managers are ready to declare that the so-called reflation trade is dead. Data pointing to economic expansion in the U.S. and around the world persist. The reflation trade has tended to regain some steam on signs of progress on Mr Trump’s agenda, including in recent sessions as the White House was preparing to release general principles for tax legislation.
“I think the market’s hopeful, but skeptical, and to the extent you get anything of substance, that’s the icing on the cake,” said Erik Davidson, chief investment officer at Wells Fargo Private Bank.