According To Credit Suisse, This Is The Only Thing That Matters To Markets

And, it will probably surprise no one, it has to do with president Donald Trump.

In a report by Credit Suisse analyst Lori Calvasina, to better understand the short term performance trends seen in the aftermath of the US Presidential election, and which trades may be most sensitive to shifting winds in Washington going forward, the Swiss bank analyzed how a handful of major macro indicators, stock market indices, styles, themes, sectors, and industry groups have been trading relative to trends in Trump’s favorability since the election, as tracked by Real Clear Politics.

What it found is that US stocks have been trading closely with shifts in Trump’s favorability, as have 10 year Treasury yields, the Dollar, and crude oil. Within US equities, small caps, value, Financials, cyclicals, domestic revenue producers, and high tax payers have been particularly tied to shifts in Trump’s favorability, as has the performance of companies headquartered in states that voted for Trump.

Said otherwise, everything is trading in lockstep with Trump’s shifting approval rating!

In short, in addition to reflecting asset prices across virtually every asset class, what happens in the S&P (or any other market) has a direct impact on Trump’s approval rating. Or perhaps vice versa – the direction of causality is not exactly clear on this one.

Credit Suisse notes that when Trump’s favorability initially rose after the election, equity investor optimism was driven by an intense focus on how to position for rising interest rates and improving prospects for economic/earnings growth driven by corporate tax reform, infrastructure spending, and regulatory relief.

But since Trump’s favorability peaked in mid December, that optimism has been replaced by a wait and see approach among many investors, along with a healthy dose of frustration. Equity investors have been clamoring for specifics on the timing and details of Trump’s tax plans – which simply aren’t available to know just yet, and seem likely to remain unknowable for quite some time – and have been struggling to understand the implications of some of the pieces of tax reform being floated for the companies they follow (in particular, border adjustment). Meanwhile, more controversial issues with less clear implications for the broader equity market have moved into the national spotlight like health care policy, immigration and global trade policy.

In short, the Trump Bump – in both his own favorability rating, and the broader markets – has faded.

Here are CS’ findings visualized: first, both stocks and bond yield move in almost perfect correlation with Trump’s approval rating.

Next, both the dollar and oil are also highly correlated with Trump.

Digging into equities, small caps and value have also tended to outperform large cap and growth when Trump’s favorability rises and underperform when Trump’s favorability falls.

Banks and other financial stocks have been most positively correlated with trends in Trump’s favorability, likely due to the coincident shifts in Treasury yields.

Another cross-sectional take of the market reveals that the performance of the highest tax payers is more closely correlated with Trump’s favorability than that of low tax payers.

The  performance of the most domestically oriented names is more closely correlated with Trump’s favorability than that of stocks with high international revenue exposure.

The performance of cyclicals is more closely correlated with Trump’s favorability than that of defensives.

Finally, CS observes that companies headquartered in states that voted for Trump have beaten the broader market (and those headquartered in Clinton states post election) and have been positively correlated with Trump’s favorability.

Ironically, in a time when dispersion between various stocks has reportedly soared, correlation between virtually all asset classes has collapsed, and it is all linked to just one thing: Trump approval rating. For the sake of market bulls, let’s hope that Trump’s favorability rating never crashes, or otherwise the artificial, central-bank created construct known as “the market” will go down with it.