Goldman: “Our Client Conversations Make It Clear That Investors Fall Into Two Camps”

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Judging by recent market action, it is becoming apparent that traders and investors are getting if not tired, then displeased with having to trade what boils down to one of two narratives: Trump Reflation Trade On, and – as has been the case recently – Trump Trade Off. As much is apparent in the latest weekly kickstart note from David Kostin who writes that with the market struggling to readjust its expectations for US government policy following the move away from health care reform, client conversations make clear that investors fall into two camps:
The first group worries that the failure to ‘repeal and replace’ the Affordable Care Act is a sign that other items on the policy agenda are less likely to be enacted than they had hoped. The second group is encouraged about the shift in focus to tax reform as the new top priority for the administration. Here Goldman notes, that despite the recent stumble by the Trump administration, its D. C. economist Alec Phillips continues to expect legislation late this year through the FY2018 budget resolution that will use dynamic scoring and some deficit expansion to reduce the statutory corporate tax rate. He views many of the additional reforms that have been proposed as less likely.
However, as Kostin cautions, from an equity market perspective, recent performance reflects an ongoing transition from post-election hope to an acceptance of political reality. Below, Kostin explains why the bank is increasingly souring not only on stocks (recall it downgraded global equities two weeks ago), but also on the broader economy:
Our S&P 500 outlook this year argued that the index would rally to 2400 in 1Q on hopes for earnings-friendly policy changes, but gradually decline to 2300 as investors recalibrate expectations to reflect the challenges of current politics in Washington. Although the S&P 500 has retreated from its record highs at the start of the month, it rose by 6% in 1Q 2017; its riskadjusted return (return/realized volatility) was the best since 2013.

This post was published at Zero Hedge on Apr 1, 2017.