I recently noted that there are quite a number of themes, both positive and negative, continuing into the new year (in “Are Investors Pulling Too Much Awesome Forward“). The ‘positives’ – infrastructure spend, tax reform, healthcare reform, and deregulation – have built a relentless bid, or scared off sellers… for the time being.
In the first several weeks of the new president’s tenure, the President’s unique style (something I call Policy Trumpacho – a riff of the movie character President Camacho) is ruffling feathers in Washington. Indeed, there could be significant delay of the ‘good’ from new policies due to political wrangling (tax and stimulus pushed into 2018). Nevertheless, the mention of the President’s tax plan this week spurred markets to new highs out of a two month consolidation.
One sector that is being dragged along with the reflation trade is consumer staples. My colleague, Arun Chopra CFA CMT, is excellent at identifying divergences and leveraging intermarket analysis. Note the striking divergence in the chart below. Consumer Staples (NYSEARCA:XLP) are ‘safety’ and Treasuries (NASDAQ:TLT) are ultimate ‘safety’. But, cereal and cigarettes are now part of the Trump trade multiple expansion, with Staples diverging from it’s partner as we approach Valentine’s Day.
Consumer Staples (XLP) vs 20+ Year Treasuries (TLT) Chart
I summarize Arun’s chart (below):
- Staples and long-term Treasuries enjoyed an enormous first half of 2016, rising 15% and 19% respectively into mid-Summer.
- After Brexit, and the Bank of Japan backing away from further NIRP, global yields backed up in late Summer and the duo gave back half their gains into Fall.
- But, since the U.S. presidential election, a divergence has opened up with Staples now back near Summer 2016 highs.
As the post-election reflation trade rolls on (dragging staples with it), keep an eye on this divergence. Still think they make a nice pair. V-Day and all.
Jason B. Leach – @JBL73
Chart by Arun Chopra – @FusionPointCapital
The authors may have positions in mentioned securities by the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
