U.S. equities were pushed lower on Tuesday as the post-election “Trump-flation” trade was partially unwound after President-elect Donald Trump — in an interview released over the holiday weekend — said the U.S. dollar was “too strong.”
The result was a breakdown in the greenback from a multi-month uptrend, falling below its 50-day moving average for the first time since September. This, in turn, unleashed a wave of trade unwinds as familiar post-election momentum plays — short Treasury bonds, long bank stocks, short precious metals — suddenly reversed.
In the end, the Dow Jones Industrial Average lost 0.3%, the S&P 500 dropped 0.3%, the Nasdaq Composite lost 0.6% and the Russell 2000 ended the day 1.4% lower. Treasury bonds were stronger, the dollar lost 0.9%, gold gained 1.4%, and crude oil inched higher for a 0.2% gain.
Strength in the greenback was the lynchpin of the three-month rally Wall Street has enjoyed, powered by optimism over Trump’s fiscal stimulus plans and worries his “America first” policies would weigh on export dependent countries like China and Mexico.
Thus, his willingness to talk down the dollar (a “verbal intervention” normally reversed for the mercantilists in Asian countries like Japan and South Korea) has scrambled Wall Street’s recent playbook and puts Dow 20,000 further out of reach.
This is happening at the sector level as well as financial stocks — which have been the leaders of the post-election uptrend on deregulation and net interest margin hopes associated with the rise in long-term yields — were the laggards down 2.3%.
Earnings news was in focus as well, with Morgan Stanley (NYSE:MS) down 3.8% after initially trading higher on Monday on a top- and bottom-line quarterly beat. Earnings came in at 81 cents per share (16 cents ahead of expectations) driven by strength in trading and institutional sales. Top line growth clocked in at 17% over last year. Separately, Qualcomm, Inc. (NASDAQ:QCOM) fell 4.0% on reports — confirmed later in the day — that regulators in the United States were preparing an antitrust lawsuit for maintaining a monopoly in semiconductor chips used in cell phones.
Defensive consumer staples, utilities, and REITs led the way with gains of 1.4%, 1.2%, and 0.9% respectively. Yield sensitive stocks are getting a lift on the strength in Treasury bonds, which boosted the Ultra Treasury Bond (NYSEARCA:UBT) to a 2.4% gain for Edge subscribers.
The equity market rollover has a ways to go based on the already mature reversals of the post-election Trump-flation moves in the bond and currency markets as shown above. The biggest beneficiary will likely be precious metals, as gold bullion is up for 16 of the last 18 days (up seven in a row) touching $1,220 an ounce for the first time since the middle of November.