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Market Commentary: Are we back on the Trump Trade Train?

Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group

The “Trump Trade” as it is sometimes referred to, is a phenomenon that began immediately after President Trump won the 2016 election. The impulse was then President-elect Trump’s promise to introduce and push through (with the help of Congress) a tax revision bill that would be friendly for corporations. One of the strongest impacts was felt in bank stocks and the 10-year treasury note yields. When bond yields rise, prices fall. This means bond owners lose value when bond yields rise. This is the inverse from stock prices which are gaining value as their prices rise.

Why does this matter? The stock market seemed to like the Trump Trade, but as 2017 moved forward, the Trump Trade seemed to fade. This was especially felt in banking stock and value stocks which have lagged for most of 2017. In addition, bonds have seen yields drop since the beginning of this year.

The question now is, are we going to experience the Trump Trade again? To answer this, it is good to know what to look for. It starts with some disruption to the current trend. The disruption that we have gotten most recently is due to the Republican Tax plan revealed September 27th followed by the House budget plan being passed on October 5th. Of course, the Senate still needs to put their budget plan together and then the two houses will have to conference to come up with something but it is increasing in likeliness that they will come together (unless it implodes like the Healthcare reform appears to have done). For now, the legislative and executive branches seem to be concentrated on getting something done for tax reform.

Meanwhile we look for signs of what will happen in the markets. Bank stocks skyrocketed in November and bond yields jumped as well (bond prices dropped quickly). That began to wear off in the first quarter 2017 when it became evident that tax reform would not be forthcoming right away. Yields also dropped (bond prices rose). However, recently we have begun to see a possible resurgence of this trend.

There are a few things we would need to see to be convinced that the market was going to react strongly to a resumed reflationary trend.

The first thing would be bank stocks breaking up further. At the time of the writing of this, bank stocks were continuing to increase, showing trend strength.

Secondly, we would want to see the 10-year Treasury note yields climb back over 2.4%. At the end of last Friday, we saw the yield at 2.36%.

Lastly, we would want to see value stocks become stronger than growth stocks. Many financial stocks re considered value stocks and this would indicate that there is more evidence that the Trump Trade has resumed.

Let’s look at it this way: Back in November, yields jumped 0.585% after beginning at 1.78% (before the election). They ended up at a high of nearly 2.6% – a big move. Beginning in September yields have risen quickly as well. So far, 0.3301%. The number to watch is the July 7th closing yield of 3.393% (hence the 2.4% watch).

In the same timeframe of the measured yield increase, the S&P 500 also rose 186 points from 2,088 – just under 9%. And bonds in that timeframe fell roughly 6.372%. In a time when many have been questioning what could happen in the stock market next, these are all numbers to keep in mind.

Certainly, there is risk that if the Trump Trade should prove to be back in force and there is a negative shock (no tax deal), the revulsion of the market at that outcome could be swift and severe. Seems like movement will happen one way or another, and there is still room to go up, but there are still market risks.

The things to watch: bank stocks relative to bond yields, value stocks relative to growth stocks and the 10-year treasury notes.

Now, grab your popcorn and get ready for the show!


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Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-576

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