If the back half of 2016 was the mirror image of its first half, then 2017 is shaping up to be something in-between. Equity and credit markets continue to grind higher but the composition of the rally has changed. Value and small caps are lagging while growth and yield-generating stocks are back in vogue. Outside of equities, things also look different. Long-dated bond yields have reversed lower, while the U.S. dollar has given up all of its post-election gains. See the chart below.
As the dollar has retreated, both of the traditional major FX alternatives—the euro and the Japanese yen—and less traditional currencies are gaining. Gold is up 12% from its December low and more exotic dollar alternatives are surging. Last week bitcoin hit a high of $2,800, making it twice as expensive as an ounce of gold. Other cryptocurrencies are also surging. This has some investors wondering whether this is the start of a long-term dollar decline. We are skeptical. Instead, we believe something more mundane is happening: a reevaluation of the post-election narrative.
Reversal of the “Trump Trade”
Not all but much of the post-election rally was predicated on a particular narrative: The new administration would provide an economic boost in the form of tax cuts and fiscal stimulus. Given the visible struggles in passing healthcare reform and the ongoing investigations, investors are reevaluating the extent to which the administration can deliver. Tax cuts and stimulus may arrive late, in a smaller package, or not at all. This is causing investors to recalibrate their growth and rate expectations, in turn impacting the dollar.