3 Investments to Buy If the ‘Trump Trade’ Reverses Course

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Investments - 3 Investments to Buy If the ‘Trump Trade’ Reverses Course

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Since Election Day 2016, a new phrase has ruled the stock market: “Trump trade.” On its face, the Trump trade is pretty simple: Investors were trading on the idea that the new President’s pro-growth business agenda, which includes infrastructure stimulus, widespread tax reform and deregulation, would spur inflation and reinvigorate economic growth.

3 Investments to Buy If the ‘Trump Trade’ Reverses Course

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The natural winners were financial institutions, the U.S. dollar, high tax-paying companies, infrastructure and transportation stocks, private prisons, and home-builders, to name a few. But the Trump trade, which propelled stocks markedly higher from November through February, has fumbled in March.

The biggest blow to the rally came when Trump and Republicans pulled back from voting to repeal Obamacare due to a lack of House GOP support. Trump’s inability to overhaul America’s healthcare system, one of the pillars of his political platform, adds a new level of uncertainty to the Trump trade. Consequently, stock markets around the globe have sold off, and the Trump trade looks in danger of reversing course. Fortunately, though, there have been some Trump trade losers that could turn into big winners if the rally does reverse course.

Let’s take a look at my three of my favorite picks.

Trump Trade Investments: iPath S&P 500 VIX Short Term Futures (VXX)

Trump Trade Investments: iPath S&P 500 VIX Short Term Futures (VXX)When the stock market goes up, volatility usually goes down. So while the Trump trade pushed the S&P 500 up from 2,100 to nearly 2,400 in just a few months, the CBOE Volatility Index (INDEXCBOE:VIX) fell in half from from 22.50 to 11.50.

By the same logic, when the stock market goes down, volatility usually goes up. As the Trump trade has shown signs of reversing and stocks have given up some gains in the past week, VIX has risen to around 12.50.

But VIX remains unusually low — in fact, it hasn’t been this low for this long since June/July 2014. By August 2014, VIX spiked to 17. iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX), my choice way to play volatility, rallied 20% in two weeks.

VIX and VXX look setup for a similar rally now. The Trump trade is slowly falling apart, and the market looks ripe for a pullback. VXX is tough to play due to contango, but the timing feels right for a rush of volatility into the market.

Trump Trade Investments: iShares Barclays 20+ Yr Treasury Bond (TLT)

Trump Trade Investments: iShares Barclays 20+ Yr Treasury Bond (TLT)Some of the biggest losers of the Trump trade were U.S. Treasuries. Trump brought with him renewed expectations for inflation, and so investors quickly ditched their low-yielding Treasuries. The 10-Year U.S. Treasury Yield, which had been below 2% for most of 2016, shot through 2% after the election and touched as high as 2.6%.

But the 10-year has since moved back down to below 2.4%, as investors have tapered back their inflation expectations. The market is also richly valued, and investors are widely expecting some sort of pullback off these near all-time highs. The more the likelihood of Trump’s pro-growth policies is called into question, the more the market looks overvalued. The more the market looks overvalued, the more investors will run back into Treasuries.

That is a good thing for iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT), my choice way to be long U.S. Treasuries. TLT has been beaten up since the election, but its recently staged a sharp reversal. If you think Treasury yields continue to head lower, TLT could have lots more upside.

Trump Trade Investments: Powershares DB US Dollar Index Bearish Fund (UDN)

Trump Trade Investments: Powershares DB US Dollar Index Bearish Fund (UDN)The U.S. dollar has been a big winner since the election. Over the past several months, there have been talks of economic growth and inflation, but also talks of a potential border tax. Many postulated that the border-adjustment tax would cause a sharp spike in the dollar.

The border tax, though, was always one of the more controversial parts of the House GOP’s tax reform plan. With Trump failing to overhaul America’s healthcare system, the likelihood of a border-adjustment tax looks even slimmer.

The U.S. dollar has now hit a four-month low, and Powershares Db Us $ Index (NYSEARCA:UDN) is surging. UDN, which moves inversely to the dollar, is still well off its 2008 through 2014 levels, so there is clearly room to move substantially higher.

Trump has also said that the dollar is too strong. That is unprecedented language for a President, but the market didn’t really pay much attention to the comment. As the reflation trade unwinds, though, investors will likely give more weight to Trump’s remark. That will likely continue to put downward pressure on the greenback.

As of this writing, Luke Lango held a long position in VXX and may initiate a long position in TLT and UDN in the coming days.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/3-investments-to-buy-if-the-trump-trade-reverses-course/.

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