||U.S. President Donald Trump (photo credit: Andrew
So much for the so-called Trump trades.
Investors and Wall Street pros are growing increasingly
skeptical that the kinds of policies that spurred a number of
markets and specific investments following the election will
materialize anytime soon.
Expectations—or rather hopes—for
rip-roaring growth thanks to lower taxes and higher spending
set in motion a variety of trades that all reflected the same
investor euphoria right after the November elections. In fact,
this excitement pervaded recent hedge fund conferences such as
SALT in May.
Stocks surged, the dollar strengthened, interest rates rose
(and bond prices thus fell), the notion being that faster
growth would lead the Federal Reserve to raise interest rates a
number of times, which would in turn send investors flocking to
However, a funny thing happened on the way to making
American investors’ portfolios
greater—investors started to become more skeptical
that some or any of these scenarios will play out anytime
While stock prices continue to mostly climb, a subsequent
reversal of conviction in a number of other markets has hurt
hedge fund managers deploying a variety of other
Rates reversed direction and recently hit their low last
seen on November 10. Since early January the dollar has fallen
back and has traded in a very narrow range for some time
These trade reversals partly explain the difficult year
experienced by macro hedge funds and commodity trading advisors
Now analysts are questioning other so-called Trump
On Thursday, for example, Deutsche Bank downgraded the
shares of Caterpillar from buy to hold and cut its price target
from $121 to $106, in part because it has grown more skeptical
over whether President Trump will get an infrastructure plan
going anytime soon. "We have no visibility into if/when an
infrastructure stimulus bill might be passed in the U.S., which
would drive increased project activity," it tells clients in a
new 22-page report. "Without an infrastructure stimulus, we see
little prospects for continued [North America non-residential]
Caterpillar is one of the largest makers of constructions
and mining equipment, diesel engines and industrial gas
turbines, among other heavy type of equipment.
Caterpillar and other stocks of companies that are likely
beneficiaries of a surge in infrastructure spending have surged
since the election. This leaves many of these stocks vulnerable
to a sharp selloff if more investors share Deutsche
For example, CAT has jumped nearly 30 percent since November
2, several days before the election. The stock rose slightly on
Friday despite the downgrade, closing around $104.
Another company whose stock has surged for similar reasons
is Martin Marietta Materials, which is up 21 percent since
early November and 34 percent since its October 11 low. Its
stock was also up on Friday, closing above $227, which is down
5 percent or so from its high.
As we recently noted, infrastructure was one among a few
major themes highlighted by veteran hedge fund manager Morris
Mark of Mark Asset Management, who spoke at the recent SALT
conference. He had acknowledged that Caterpillar’s
stock was not cheap, but said Martin Marietta Materials, a
supplier of construction aggregates and heavy building
materials would do well with or without an infrastructure bill,
which he insisted was not priced into the stock.
Another Trump trade that could be vulnerable is credit in
general and high yield bonds specifically.
In a report published June 21, UBS stresses that
investors’ mood has changed from earlier this
year, when there were expectations of sweeping tax reform and a
significant uptick in U.S. GDP.
"Fast forward to today and investors are downplaying the
likelihood of fiscal stimulus," it adds. "Global credit
impulses have fallen sharply. Consumer delinquencies are
rising, raising doubts about the health of U.S. consumer
balance sheets. And further declines in oil are leading
investors to question the state of global demand weakness, not
only U.S. shale oversupply."
Despite these developments, UBS points out that credit is
holding in, "admittedly better than we anticipated, given an
uptick in macro data disappointments."
It explains investors believe growth is strong enough to
justify current credit spreads.
However, UBS tells clients that the U.S. high-yield market
continues to price-in too much good news. "Put simply, U.S.
high-yield spreads relative to U.S. investment-grade spreads
imply a stable mid-cycle environment, akin to 2004-2006 or
2013-2014," the investment bank elaborates. However, it says
the credit signals it tracks "remain moderately weaker than
those in prior periods," suggesting a weakening economy.
It recommends investors rotate into longer-dated investment
In fact, one of two ways it believes it would be wrong is if
there is an "increase in U.S. tax reform odds."
So much for blindly following Trump-onomics.