Trump trade debate

Has the rip-roaring stock rally that started last November run out of gas?

Some wonder if the Trump reflation trade is fading, given the failure by House Republicans to repeal ObamaCare.

 

Trumpster

 

If they can’t manage that with control of the White House and Congress, how will tax reform and an infrastructure spending bill get passed, skeptics wonder.

Stocks have had quite a run. The S&P 500 Index is up 17% over the last year and 6% through the end of March of 2017.

 

 

Bloomberg: S&P 500 Index

Bloomberg: S&P 500 Index

 

 

Momentum

By one measure, there seems little to be worried about, in my opinion.

Bespoke Investment Group has analyzed first quarter performance of the S&P 500 during the current bull market that started in March of 2009.

The current 5%-plus performance is pretty much in line with other first quarter performances, according to the chart below.

 

Source: Bespoke Investment Group

Source: Bespoke Investment Group

 

Small Caps

However, there are some warning signals, in my view.

One potential issue for investors may be the widening valuation gap between small-cap and large-cap stocks.

The forward price-to-earnings ratio of the Russell 2000 is 25.4, according to Zacks Investment Research.

That’s the highest level since 2009 and well above a 10-year average of 20.7.

 

Divergence

Another potential, according to the Wall Street Journal, is the divergence of stocks from the U.S. dollar and bond yields.

Until December, all three moved in unison.

Since then, the dollar and bond yields have weakened, a potential sign of economic weakness, according to come analysts.

 

trump bump 2

 

 

Takeaway

It’s probably too early to conclude the Trump trade is done, in my opinion.

Yet there are challenges. Stock valuations are pricey.

Also, some analysts, wonder if stock prices have drifted from underlying fundamentals.

Stay tuned.

Photo Credit: Gage Skidmore via Flickr Creative Commons

Xavier Brenner

Xavier Brenner