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ANALYSIS: For markets pricing in perfection, Trump must deliver

Growth and inflation expectations have surged in the wake of his election as president, currencies have swung and trading desks have hummed with activity. Goldman Sachs, for example, reported a tripling in Q4 profits earlier this week, boosted in no small part by a big pick up in trading activity following Trump’s election.

Hedge funds too are in on the act. As Société Générale pointed out in its latest Hedge Fund Watch report: “In the wake of Trump’s election victory and a more optimistic growth outlook (consensus forecasts for the next recession have shifted out until mid-2019 to early 2020), market positioning has reached extreme levels.”

Net long

Examples of this extreme positioning can be found in all asset classes the firm said. Copper net long positions, for example, recently set new highs, while positioning in the US-small-cap-oriented Russell 2000 index has never been so bullish – net long positions are three standard deviations above the historical average, Societe Generale said.

“This would suggest that hedge funds are fully convinced that Trump’s economic policy, centred on protectionism and fiscal stimulus, will work out well for US small cap companies,” the firm said, adding, “Even ahead of the inauguration on 20 January, the risk of investor disappointment seems rather high.”

This is especially so because it is not only the positioning that is extreme, it is also the level of uncertainty about what the future might hold.

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