Will The President Sound The Trump-ets For Infrastructure Spending?

To illustrate how far markets have come from the US election, allow me to relay an anecdote from last weekend: At her 88th birthday celebration, my grandmother, a dyed-blue retired schoolteacher, asked how far the "Trump Rally" could push stocks. An old market koan identifies periods of excessive market euphoria as times when even your shoeshine boy gets interested in the market, and to say that alarm bells were going off in my head would be an understatement.

The Donald will take the stage at 9:00pm ET to address to the joint session of Congress in one of the biggest tests of his young presidency. Expectations are high that the President will provide more details on his specific policy proposals, including the "juice" that's been driving the "Trump Rally", namely details on his promises to reduce regulations, boost infrastructure spending, and reform the tax code.

While stocks haven't wavered yet, there are some early signs that, at least on the tax reform front, little clarity is forthcoming. Over the weekend, Trump's Treasury Secretary Mnuchin stated that the President would "touch on tax reform" but the latest scuttlebutt is that a specific plan has been shelved until after healthcare is addressed. Nonetheless, any additional information on an infrastructure bill could overshadow any tax-related disappointments.

Earlier today, Bloomberg noted one sign that traders may be exercising some caution, despite the longest winning streak for the Dow Jones Industrial Average in thirty years. Namely, the sectors that have been leading the market higher over the last three weeks come from the more "defensive" industries, including Health Car, Utilities, and Real Estate:

Source: Bloomberg

The chart above also shows that more cyclical Energy and Material stocks have been lagging the overall market. No doubt part of this recent price action reflects the inevitable intermarket rotation between leading and lagging sectors; in other words, a portion of those moves may just be "noise" rather than a valuable market signal.

That said, there's definitely the potential for a big surge in the most cyclical/inflationary Energy and Materials sectors given the recent underperformance if Trump is able to cogently outline an economic policy agenda. The question for traders will be whether the market's short-term bar has been set too high after a 12-day (going on 13-day?) rally.