Call for caution as Trumpflation rally loses steam

The S&P500, for example, is now trading some 12 per cent above its pre-election level. 
The rally has been underpinned by hopes that the new president will kick off a new investment cycle and deliver the hefty tax cut laid out on the campaign trail. 
The “Trumpflation” rally, however, hinges almost entirely on rising optimism rather than improved fundamentals. 
In fact, the consensus profit estimate for the 2017 S&P500 has been cut by 3 per cent since November, which makes the stock market even more expensive in terms of P/E valuations. 
The US stock market is also expensive by historical measures. At almost 22 times earnings, it has never been this highly valued since the dot-com bubble in the early 2000s.
The risk of pro-growth policies getting delayed by political setbacks has also risen. 
The recent attempt to repeal Obamacare, another main pillar of Trump’s platform, failed to gain support from House Republicans, raising doubts over Trump’s ability to push through the promised tax reforms and infrastructure investment. 
After all, without savings from ditching Obamacare, cutting taxes will result in large fiscal deficit, which will be met by stiff resistance in Congress. 
Despite the major political flop, the stock market has been holding up quite well. 
However, there are growing signs of anxiety elsewhere in the financial world. 
In the derivatives market, speculative positions in safe-haven assets such as gold and the Japanese yen have recently grown, reflecting the hedge funds’ bet on such assets to go up. 
The bond market has not shown much enthusiasm either. 
With US long-term bond yields drifting lower in the past several weeks despite the Fed’s decision to raise the short-term policy rate, bond investors have been betting economic growth will worsen, not improve. 
The credit market has also been trading at odds with the stock market. The high-yield credit spread, the gauge of default risk by smaller borrowers, has crept higher since late February.
With lofty stock market valuations and heightened policy uncertainty, investors should proceed with caution. We recommend investors take profit and hold some cash to take advantage of the dip. 

KOMSORN PRAKOBPHOL, head of strategy at the Tisco Economic Strategy Unit, can be reached via www.tiscowealth.com or [email protected].