A Strange Trumphoria Rules the U.S. Stock Market. For Now

Somewhat mysteriously, stocks have been on a tear since Donald Trump was elected the nation’s 45th President. And it’s not just that the Dow Jones industrial average is up nearly 800 points in the past three weeks. The parts of the market that are leading the Trump rally are a little baffling too–at least at first blush.

For instance, Goldman Sachs, the investment bank that has become the poster child of financial elites and globalization, has seen its shares soar more than 17% since Trump’s populist victory. That’s five times the gains of the broad market. Meanwhile, sectors that generate a sizable portion of their sales overseas–including industrials, basic material and energy–have also outperformed, despite Trump’s threats to nix or renegotiate global trade deals and impose tariffs.

So what’s going on?

Wall Street appears to be overlooking Trump’s campaign rhetoric about trade, at least for now. Instead, investors have been focusing on how Trump’s other ideas–including spending $1 trillion on infrastructure projects and slashing personal and corporate taxes–could stimulate growth and inject inflation into the economy.

Fixed-income investors are particularly fearful of inflation, so this explains why bonds have lost more than $1 trillion in value in recent days. Since election night, the global bond market has lost nearly 4% of its value.

Of course, Trumphoria didn’t actually start with Trump’s victory. “A lot of the trends we attribute to Trump–the rise in bond yields, the outperformance of financials and energy and materials stocks–were happening prior to election night,” says James Paulsen, chief investment strategist for Wells Capital Management. “What the election did was exacerbate and crystallize those trends.”

In any case, the result is something of an overreaction. “The market is acting like Trump will build a wall around the country and install a Rooseveltian spending program while repealing Obamacare in the first 100 days,” Paulsen says.

Brian Singer, a portfolio manager for the asset management firm William Blair, agrees. “Infrastructure on a massive scale is easier said than done,” he says. “There’s so much regulatory red tape to get shovels in the ground, and that realization may finally be seeping into the market.”

Rising rates, meanwhile, come with their own risks. “Mortgage rates are up to 4%,” says Conor Muldoon, a portfolio manager at Causeway Capital Management. “If that gets to 4.5% or 5%, you could see housing activity take a hit.” Another threat is that this much stimulus injected this late in a recovery–the unemployment rate has been falling for seven years and is now down to 4.9%–may not spur economic growth as much as investors assume. “The economy is already at full employment, so that stimulus applied now is more likely to stoke higher inflation and interest rates than greater real GDP growth,” says David Kelly, chief global strategist for J.P. Morgan Funds.

Terri Spath, chief investment officer at Sierra Investment Management, says investors weren’t necessarily wrong to bid up shares of sectors that benefit from higher inflation and interest rates. “But how much opportunity are we going to have in those areas,” Spath asks, going forward?

If Trump’s victory, which confounded almost every pollster, proved anything, it’s the value of thinking counterintuitively. On Wall Street, that means looking to cheaper stock and bond markets abroad, which have largely slumped since Nov. 8.

As Kelly points out: “While the theme of Mr. Trump’s campaign was ‘Put America first,’ the clear investment implication of inappropriately stimulative U.S. fiscal policy is for investors to make sure they have enough invested overseas.”