Curious what other traders are most confused about? Courtesy of RBC's Charlie McElligott, we now know the answer: "what is driving this move?" Below is the attempt by the RBC cross-asset strategist to explain it.
The "Right Kind" Of Trump Driving Equities Melt Up, TSY Sell Off
#1 inquiry yesterday far-and-away was “what is driving this move?!” with S&P ripping to all-time highs and fixed-income getting hammered—plenty of talk making the rounds that there was another large asset allocation trade (no clear-cut / tell-tale ‘blocks’ to speak of though); or that macro funds were “putting reflation back on” (somewhat doubtful, as FX was dead-as-a-doornail)…both of which seemed like folks “backing into” an explanation.
My simple take: the market was finally seeing the Trump which they’d been hoping for over the past few months. The administration made Tuesday a day of “pro-growth” policy and “deregulatory” action, with the scissors out for bureaucratic ‘red tape’--
- A ”presidential memorandum” to accelerate the building of the Keystone XL pipeline (28,000 construction jobs)
- A ”presidential memorandum” to accelerate the Dakota Access pipeline
- A ”presidential memorandum” dictating that the secretary of Commerce to develop a plan to mandate usage of American-made steel for all new, expanded or retro-fitted pipelines in the US ("Going to put a lot of workers, a lot of steelworkers, back to work”)
- A ”presidential memorandum” to the secretary of Commerce to review plans on expedite manufacturing regulations—e.g. expediting EPA reviews
- An executive order to fast-track “high priority infrastructure projects”
It seems abundantly clear that this is the type of behavior the market is looking to reward. Here’s what President Trump said at the signing ceremony, which speaks to the “basic logic” which many voters, municipalities AND corporate CEOs wanted to see return to government: "We can’t be in an environmental process for 15 years if a bridge is falling down."
In addition to the ‘buzz’ generated by the Senate Democrats’ $1T infrastructure proposal yesterday, we saw a potent expression of 1) pro-growth policy ‘rubber meeting the road’ and 2) ACTION from D.C. politicians. Traders spoke, and now we see all global equities markets higher—record highs in Nasdaq and S&P, all EU indices back to “up” YTD, Nikkei saw its best day since the start of December, while too EM equities have even re-accelerated higher into this ongoing +++ global data parade and “animal spirits” joy.
- As stated in yesterday’s note, the thematic cross-asset action (ex FX) and intra-equities was of late November / early December vintage, as ‘cyc vs def,’ ‘inflation longs,’ ‘value vs growth / defensives’ all worked, while USTs were under heavy pressure, BE’s and real yields broke higher and credit high beta outperf over low (HY>IG).
- It’s been awhile since we’ve visited the QI factor model to update macro regimes…and that’s because the regime for SPX remains “utterly stable,” with very high R-squared of 87%.
For the S&P 500, QI shows the key price drivers as 1) inflation expectations 2) 1 year forward earnings estimates 3) energy prices and 4) credit spreads. In the current case, we see the ongoing benefits of the energy ‘base-effect’ directly into the price of SPX, alongside the derivative ‘virtuous cycle’ of the energy sector weighting in HY index as well as the heavy role it of course plays in setting inflation expectations.
The ‘earnings’ input is super-critical then, as it crystalizes the EXTREME IMPORTANCE of the Trump corporate tax cut plan. Using the 1 year forward S&P earnings estimate, a rule of thumb is that for every 1 percent of tax cut, you theoretically would see an additional 1.32 added to earnings. So if we were to envision a cut in corporate tax rate from 35% to 20% (Ryan plan, not the uber-aggressive Trump 15% tax-rate aspiration), 1.32 x 15 = $19.80 added to S&P earnings.
SPX 12m EARNINGS: