Donald Trump was elected on the premise that an "America First" economic platform would improve U.S. job creation and economic growth at the expense of trading partners, including Canada, where he believed trade deals put his country at a disadvantage.
According to one measure, things are not going as planned for the new President and for now, the market appears to be losing faith in the bold reflationary experiment.
The chart below was first presented by macro strategist George Pearkes from Bespoke Investment Group. It compares the relative performance of Russell 2000 index of U.S. small-cap stocks – a good proxy for U.S.-focused equities – with returns for emerging markets equities by simply dividing the price of the iShares Russell 2000 ETF by the price of the iShares MSCI Emerging Markets ETF.
A rising line indicates U.S. smaller companies are outperforming developing world stocks. A rising line also implies that President Trump's economic goals – U.S. retaking global growth leadership – are being met.
The chart shows three years of data to emphasize that, thanks to a strengthening currency, the Russell 2000 was outperforming the MSCI emerging markets index long before the U.S. election. American voters definitely intensified the trend, as the sharp, immediate postelection spike higher on the chart indicates.
"The market always looks forward" is the time-honoured investment cliché emphasizing that the level of optimism is reflected in asset prices. Where emerging markets and domestically focused U.S. equities are concerned, sentiment appears to have made a major change in course at the end of 2016.
Emerging world stocks began outperforming the Russell 2000 on Dec. 27. Since that point, the emerging markets ETF has climbed 15 per cent and the Russell 2000 ETF is roughly flat, up just more than 1 per cent.
The market reaction to the Federal Reserve rate increase Wednesday only reinforced the recent trend of U.S. asset underperformance. Fed chair Janet Yellen said the economy was "doing well," but the Fed's economic growth forecast was not raised significantly. Global investors looking for a sharp acceleration in the U.S. growth outlook were disappointed and as a result, bond yields and the U.S. dollar fell sharply.
This is only one point in time, but it's clear investors in the postelection period have accomplished an almost complete about-face, from U.S. economic exuberance to a far more skeptical stance.