A month ago, the dollar and stock markets were riding high as investors bet that the Trump administration, together with the Republican-controlled Congress, would usher in an era of lower taxes, more government spending and looser regulations.
But as questions mount about how the new administration would carry out such an ambitious agenda and Trump himself sends mixed signals, investors are wondering whether Trump will end up actually being a game changer once he takes office as the U.S. president on Friday.
In the weeks after the Nov. 8 election, Wall Street's major indexes were on a tear. The benchmark S&P 500 gained around 6% in that period and posted a series of record highs.
Longer-dated Treasury yields, which move inversely to the price of bonds, jumped to their highest levels in more than two years on fears about a spike in federal borrowing and inflation stemming from Trump's policies. The dollar hit a 14-year high against other major currencies on bets that Trump would adopt expansionary fiscal policies that would lead to higher interest rates, and gold, a traditional safe haven, fell to its lowest level in a decade.
Investors are now coming back to earth—and bringing market valuations with them.
"Now we are nearing the inauguration, how much of this can really get done?" BMO Private Bank's chief investment officer, Jack Ablin, said. He estimated the S&P 500 is about 20% over-valued.
Valuations for equities and the dollar now appear stretched, and some investors have scaled back their bullish bets. In turn, they have piled back into bonds and gold as they reassess how many of Trump's perceived pro-growth policies would likely be enacted.
“We made modifications to our portfolios based on potential changes to the fundamentals from Trump policies by analyzing their near- and long-term impact on growth and inflation," said Amit Chopra, portfolio manager at Western Asset Management Co in Pasadena, California, with $444.5 billion under management.
Chopra said his firm saw value in Treasuries following a selloff that knocked nearly $2 trillion in bond market value across the globe. "Our clients are fairly neutral now," he said.
Perhaps it's only a pause
Not everyone thinks the bull market is over.
Investors who made "Trumpflation" trades—a term coined by traders for market bets that would benefit from both faster economic growth and inflation—are sticking with them in the belief that even a modicum of fiscal change by Trump would benefit their bets.
"It's more of a pause than a big reversal in the reflation trade," said Ed Campbell, portfolio manager at QMA, a $116 billion multi-asset manager wholly-owned by Prudential Financial, in Newark, New Jersey.
Speculators including hedge funds built record net short positions in Treasury bond and interest rates futures last week, signaling their confidence that inflation will rise and the Federal Reserve will raise rates further to keep the economy in check, according to data from the Commodity Futures Trading Commission.
This massive bet against bonds suggests that "rising U.S. bond yields remains among hedge funds' major convictions," Societe Generale analysts wrote in a note this week.
Wait for details
Still, the Dow's struggle to advance above the historic 20,000 milestone and the dollar's pullback, some analysts say, reflect frustration among investors over the lack of details on tax reform, infrastructure spending and deregulations from Trump.
"The market has priced in a lot of good news. Now there are increasing concerns that Trump can't pass his entire agenda," said Paresh Upadhyaya, director of currency strategy at Pioneer Investments in Boston.
Instead of forging his economic message into a legislative agenda, Trump has fired off comments on a scattershot of subjects that at times have contradicted his own policy goals and confused investors.
The latest example was Trump's critical comment about a strong dollar "killing us" in a Wall Street Journal interview last weekend. It walloped the dollar index to a six-week low on Tuesday, when markets reopened after a long holiday weekend.
"There's a little less confidence that if you try to change everything that anything specific will change," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.
Until clarity from the incoming administration emerges, investors are taking some chips off the table as they see some choppy times ahead.
"I think volatility will rise. I think this is a lull before his ability to actually take actions," Meckler said.