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Consumers and inflation — What you need to know in markets on Friday

Myles Udland
Markets Reporter

The biggest economic theme since Donald Trump’s election has been the spike in sentiment among businesses and consumers.

And on Friday, we’ll get another look at how consumers are feeling with the final release of consumer sentiment from the University of Michigan in the morning. Elsewhere on the calendar we’ll get a look at personal income and spending, along with personal consumption expenditures, which is the Fed’s preferred measure of inflation.

On Thursday, we learned that in the fourth quarter the U.S. economy grew at an annualized rate of 2.1%, better than expected. Personal consumption, which accounts for about 70% of GDP, rose 3.5% in the fourth quarter.

Stocks also finished higher on Thursday, with Monday morning’s jitters now seeming like an increasingly distant memory to markets, indicating once again that for all of the political turmoil in Washington, D.C., markets remain largely undeterred.

Trump trades

A question asked almost every day in markets is whether the “Trump trade” is still intact or whether the “Trump rally” can last.

The answers to both questions are both, ‘Yes’ and ‘No.’

Defining the “Trump trade” or “Trump rally” as simply indicating higher stock prices and higher bond yields since the election gets you a ‘Yes’ to both. Stocks are higher than they were ahead of the election and have more or less remained higher since. Bond yields, while off their most recent highs, are also above where they were on November 8.

And whether stocks can continue to go up is a question to which there is no right answer except to note that, on average, stocks in the U.S. go up about 7% per year.

But each of the “Trump trade” and “Trump rally” were also, to some extent, underwritten by certain ideas that specific trades would be better than others in the Trump era.

If we got more infrastructure spending and a generally lax fiscal stance, inflation would rise and growth would increase. This reflationary environment was supposed to be good for stocks and bad for bonds.

If taxes were cut, then specific baskets of stocks would benefit greatly. If the Trump administration went through with implementing a border adjustment tax to both make international trade “more fair” for American business and pay for some of the tax cut, this would be bad for another basket of stocks.

These two specific definitions of how the Trump administration is impacting asset prices have been harder to nail down in recent months mostly because neither really seems to be working. And yet, stocks are still higher.

In a note published on Monday, Bank of America Merrill Lynch quant strategist Savita Subramanian wrote that the performance of most stocks set to benefit from policy peaked in December and have since underperformed or been in-line with the market.

Trump trades since the election. (Source: Bank of America Merrill Lynch)

Stocks at risk of bearing the brunt of a border adjustment tax, which would tax imports and subsidize exports, have been the biggest mover — and loser — in recent months. Though with the retail sector making up a considerable part of this basket, it is hard to exactly suss out whether this decline is about fears over a tax or the secular decline of retail.

Meanwhile, tax and infrastructure beneficiaries have been flat.

And according to Goldman Sachs’ proprietary basket of tax beneficiaries, these stocks are now below where they were after the election.

The “tax trade” has already fallen apart. (Source: Goldman Sachs)

Taking all this, together, then, it’s clear the market is already moving past the idea of Trump-specific trades. Maybe the talk should, too.

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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