It's The Reaction That Counts

1450 words - a commercial break read. 

It’s not the news but the reaction to the news that investors should pay attention to. This is an old investor adage and one that has been resonating in my mind over the past few weeks. We have written about it before and address it again in part because there is so much news – the Trump related gusher of tweets, response to tweets etc. Add in the annual outlooks rolling across the screen, Korean coup attempts & falling French Govts together with all the football news one (or me) has to keep up with: bowl placement, HS signing day – it’s a lot. 

How bout the SEC and the College Football Playoff (CFP) – is it just me or can one juxtapose the SEC & USA and compare playoff spots with relative stock valuations?

Like I said, it’s a lot. So one way to deal with all this information is to pay less attention to it. Yes, less attention not more. Why? Because it saves one's vision, reduces headaches & reminds one we are dealing with Trump 2.0 and thus a known playbook while recalling that chaos is a feature not a bug. It allows one to relax a bit and focus on the reaction to the news – the old timers – they knew a thing or two.

Recently, we have had some clear reads on what global markets have priced in for some of these very issues. We noted this last week but its worth a fuller explanation. We are all trying to figure out Trump’s next moves and he obliges us as he did last Tuesday night tweeting out tariff threats against Mexico, Canada and China.  

Now from a Tri Polar World (TPW) POV one wonders why the US would want to torpedo regional integration in the Americas when China is busy integrating Asia (China now trades more with SE Asia than with the US) and Europe accelerates its integration as it becomes increasingly clear size is one way to stand up to a bully.

We will discuss this more in next week’s Monthly; for now, let’s focus on the tweet threats & the clean market reaction given the timing was a surprise. So, given that it’s not the news but the reaction to the news we want to look at how did markets react? Short answer – they barely responded. Sure, the Mexican peso slipped a percent or so but Chinese assets, stocks, FX barely blinked. VIX and MOVE volatility indices were quiescent on the day & subsequent – VIX close to 13 today while MOVE close to 90.

A week or so later and the peso is stronger than it was pre tweet, Chinese stocks too. We took a quick look at FXI, the China Large Cap ETF and note that it is up 29% over the past year, barely trailing the monster SPY move, up 34%. China has outperformed ACWI, up 26% not to mention ACWX, up 12%, EFA, up 12% or broad EM, up 11%. The technical case for China equity is strong with both Carter Worth and JC Parets at All Star Charts bullish China equity.

What does this muted reaction to big tariff threats tell us – after all the tweets called for 25% tariffs on all Mexican exports to the US and an additional 10% on all Chinese exports to the US. Well, it suggests that Trump tariff threats are old news, a repeat from Trump 1.0 when he went after the same players in his opening tariff salvo. Reruns are boring, reruns are in the price. We can skip the freakout phase.

This last point is what sticks out to us – that much of the Trumpian threat to the rest of the world seems to already be in the price of these assets. The folks who worry about tariffs are not invested in Chinese equity or Mexican pesos – they are uber long the S&P, the Magnificent 7, Crypto etc. We note US equity inflows totaled $141B last month, by far the largest monthly inflow ever while Barchart reports China equity ETFs are on track for largest ever monthly outflows.

If there is one thing that comes across pretty clearly in those 2025 outlook pieces – its that everyone loves the US, everyone is OW US assets and after two years of getting their forecasts wrong, embarrassingly wrong for 12M forward SPY returns, Wall St has had enough and now sees further US equity gains for the year ahead. Happy to note TPW Advisory was not one of those 2024 bears – long time readers might recall we were quite positive on 2024 calling for a return to stability and early cycle not late.

It's not just EM either, this past week also provided a real time assessment of what is in the price of European assets, particularly French assets as the newly installed Govt fell setting a record for the shortest ever post war Govt. Given the uncertainty this engenders -  will Macron resign, will Le Pen finally get to power, one would think French assets, especially OATS given this is a budget deficit and spending issue, would be blowing out.

Ok so that’s the news – shortest Govt in French post war history, a surprise political outcome, what was the market reaction to the news? Euro Stoxx 600 has been up six days in a row, its best win streak since May, while the OATS have rallied and are now tighter vs Bunds than they were several weeks ago as the Euro enjoys its best multi day run since October. 

Who doesn’t know Europe is a slow growing, unproductive basket case? It’s in the price. Btw, how many articles can one read about US productivity – they are sprouting like mushrooms. Trust us, we agree and have been on this for over a year (see our 2024 Outlook & macro surprise #2 – better than expected productivity growth) but now its become religion & in the price.

This leads us back to something we think could surprise in 2025, namely the potential for Trump to be a positive catalyst for non-US change. Something that is NOT in the price of cheap, under owned non-US assets, that most dismiss out of hand (trust us we’ve had the phone calls & zoom meets) and yet what seems to be playing out in real time. If there is no one to sell tariff fears & Govt collapses, then it stands to reason that no one is there to enjoy the upside of positive policy action.

The number of Bloomberg articles noting the passage of Japanese fiscal stimulus, the likihood of additional Chinese stimulus, the Bundesbank’s head coming out in support of easing the fiscal debt brake (something that has true experts like Michael Pettis stating on Twitter that such support was not something he expected to see) are legion & all note Trump as a reason to move now. When folks who really pay attention are surprised and yet the market reaction is a yawn at best, that suggests we want to pay attention, close attention.

German fiscal stimulus under a new Govt next year is a done deal – it’s a question of how much; French fiscal consolidation is off the agenda. There is no political appetite for spending cuts, the opposite in fact. Remember Germany has loads of fiscal room, China too (central Govt). We agree; our positive, Long Cycle, outlook is built on a global growth outlook underpinned by both monetary easing (BofA expects 100+ rate cuts in 2025) and fiscal stimulus as part of the public private partnership model driving the new global industrial policy era.

Who knows what Trump is going to do or try to do? Sure its Trump 2.0 so there is a playbook and yes he has true believers in his gilded Cabinet to be but he also has no room for error in the House and said Cabinet is riven with disparate points of view on growth vs spending (Bessent vs Musk) on China (Navarro et al vs Musk) and on tariffs (Lutnick for, Hassett against) etc. 

US assets are priced for perfection, ROW is priced for the opposite – US has never been more expensive on a relative valuation basis, trading at a 60% premium on a 12M forward PE basis, never been more over owned (close to 70% of ACWI). Rest of world knows it has to protect itself against the Trumpian chaos machine while also competing in the AI race, Climate and Defense. These are all existential issues and thus Trump serves as supportive reason to act now. A catalyst if one will.

Watch not the news but the reaction to the news.