Is this still a Trump rally? The answer is still no. In fact, one can argue that all asset classes are performing inversely to his presidency. Look at what has happened year to date.
The stocks in the highest quartile of corporate tax rates have underperformed the lowest quartile by about 400 basis points.
The DXY dollar index is down 9 per cent for the year even with the recent recovery – how does this depreciation fit into the "America First" narrative?
And while bond markets are range-bound, the 10-year T-note yield is down 10 basis points for the year. So much for the 3-per-cent call most pundits had on the books at the turn of the year when "animal spirits" were all the rage. How does this dovetail with the big reflation view? And guess what sector is leading the equity market so far in 2017? The tech space, with a 30-per-cent surge, more than doubling the rest of the S&P 500. This was the area that was supposed to be avoided with Donald Trump's leadership, since Silicon Valley did not support him during the election campaign, and this is the part of the economy most sensitive to reduced cross-border trade flows and disruptions to global supply chains.
And, as a sign of how little has been done on the agenda front (no health-care reform, tax reform is hardly a slam dunk and what happened to repeal of Dodd-Frank?), we see that the financials, the poster child for deregulation, have lagged the broad market by 150 basis points year to date. That surely wasn't supposed to happen.
And finally, what else was supposed to benefit more from an "American First" protectionist policy than the small-caps, which are almost entirely domestic? Well, they have lagged the large-caps by some 500 basis points so far this year.
So this market is rallying to new highs, but I would argue that this is despite the White House, not because of it. A weaker dollar has helped, that much is for sure. And the Federal Reserve scaling back its forecast of the terminal funds rate has contributed, too. I would have to say that the biggest "delta" in terms of actual compared with expected growth has come mostly from Japan, Southeast Asia and much of Continental Europe. Macro fundamentals in wide swaths of the emerging-markets landscape also have improved, and that includes previous basket cases such as Russia and Brazil. Considering that up to half of S&P sales are derived from foreign operations, it is little wonder that the U.S. large-caps have done well with better global growth and the crutch this year of a weaker dollar.
And why is the CBOE market volatility index (VIX) sitting at 10.05 in a presidency that was supposed to shake up the status quo? The fact that there is so much calm everywhere may well be more easily traced to Beijing than to Washington, where efforts to stabilize and strengthen the yuan have rendered the last steep correction caused by the exact opposite backdrop a distant memory.
Furthermore, most of the world is in a better place when the oil price is steady around $50 (U.S.) a barrel than when it is south of $40 and sliding, as was the case just a few years ago. This has much more to do with the Organization of Petroleum Exporting Countries and other producers complying with and extending their output-cut agreement and the better tone to demand abroad than anything to do with U.S. federal government policy.
It almost seems like a miracle that the U.S. stock markets could either be at or challenging all-time highs in the face of the relentless friction between the Trump administration and Congress, the inability thus far to move any of the pro-growth agenda through the legislative process, the shift toward a xenophobic immigration stance and a clear tilt away from the certainty that existing trade pacts provide. But it goes to show that, contrary to popular opinion, the tailwinds are coming from other forces.
The bigger question is whether these forces will persist, especially given the changes that are going to take place in the coming year. A likely new Fed chair at a time when the central bank is shifting toward less-accommodative policies, including the balance-sheet unwind. The announcement of a new European Central Bank president is imminent, and whoever it is will probably not be the same reliable dancing partner the markets had under the Mario Draghi tenure. Populism is on the rise again in Europe and the next shoe to drop is Italy's election by May of next year. Japan goes to the polls on Sunday and the question is how a nationalistic Shinzo Abe will treat another majority (who remembers what a militaristic Japan looks like?). A similar question is what another five years under Xi Jinping will look like in his quest for Chinese supremacy in the Pacific (and beyond). And in the United States, we are approaching the midterm elections, and the Democrats retaking the House is no longer a low-odds bet (with obvious implications for those investors who have been betting on the Trump agenda finally moving through Congress).
Change on such a global scale means heightened uncertainty and volatility. So something tells me that the VIX will not be hovering at 10.05 as we move through the coming year.
David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
David Rosenberg