Deflating the Reflation Trade

Anticipating the results of the Presidential election, some investors made the bet that the U.S. economy was on the verge of reflation. The polls pointed to a “blue wave’, so the calculation was that a really big stimulus package along with other initiatives like massive infrastructure spending would accelerate the economy and inflation. This would lead to higher interest rates and better business prospects for many traditional businesses that are sensitive to the business cycle.

Once election results started coming in, it became obvious, no “blue wave” was occurring. Immediately, these investors reversed their positions in favor of growth companies that were likely to continue to do well during a more sluggish recovery. These are the same stocks that have been leading the market.

This reversal of expectations explains some of the recent stock market volatility. First there was a move out of the defensive and growth companies in favor of cyclicals and then back again. Hopefully, the investment picture will soon settle out and everyone can get back to assessing individual opportunities. In the meantime, the averages have held up well, just a lot of change within them. Stay steady my friends.

The Lonely Bull