AXIOMA ROOF™ SCORE HIGHLIGHTS

This special edition focuses on the impact Trump 2.0’s first 100 days (70 trading days) had on investor sentiment. The usual charts can be found at the end of this report.

Investor sentiment, much like consumer confidence and presidential popularity, has soured on Trump during his first 100 days. It is clear that investors had different expectations from a pro-business President and a Republican Congress. The before-and-after pictures in terms of market risk, correlation, factor returns, and willingness to speculate, tells the story of a complete U-turn in their original investment thesis. Portfolios constructed in Q4 2024 to capitalize on campaign promises of lower inflation, lower interest rates, lower taxes, deregulation, and a peace dividend from ending the wars in Ukraine and the Middle East, have had to be rebalanced for the new reality. Adding a threat to the Fed’s independence into the mix, was a step too far for investors, sending them running for the exits.

T-100 Days: The contrast between the sectors and styles investors were betting on before inauguration and those they have fled to since, especially after April 2nd, can be seen in the performance of the Risk-On and Risk-Off ROOF Portfolios for the STOXX USA 500 . The figure below shows the cumulative performance of our two ROOF variants for the STOXX USA 500 index (Risk-On and Risk-Off) during the seventy trading days prior to inauguration (to keep the periods the same), from October 8, 2024, through January 20, 2025. During October, Donald Trump had taken a commanding lead in the polls, and investors had already started positioning their portfolios for a Trump win. The Risk-On portfolio (red line) outperformed both the parent index (black line) and the Risk-Off variant (blue line) for the entire period as investors positioned themselves for a pro-business administration. The orange bars in the chart represent the ROOF Score on those dates, and the cards on the side summarize investor sentiment during this 70-day period.

T+100 Days: In contrast, the chart below illustrates the performance of our ROOF Portfolios during the 70 trading days following Trump’s inauguration, representing his first 100 days in office. Notably, investors did not feel bullish or even positive for a single day during this period. They experienced four neutral days in mid-February, but otherwise felt either negative (43 days) or outright bearish (23 days). This negative balance in the demand and supply for risk led the STOXX USA 500 to decline by 6.8% during this period. By February 20th, the Risk-On variant had given up its early outperformance and underperformed for the rest of the period, managing to catch up to its Risk-Off counterpart only in the last ten days, as the Trump administration announced another set of de-escalation measures in the trade war that started on April 2nd. It is also noteworthy that during the entire period, the Risk-Off variant consistently outperformed the parent index, while the Risk-On variant alternated between outperformance and underperformance, only to outperform again in the end. Both ROOF portfolios ended the period outperforming their parent index (sorry Mrs. Buffett). 

Lessons from the first 100-days: Hubris, investors have learned, is like a fart. You can tolerate your own, but you just can't stand anyone else's. The surge in uncertainty has left investors struggling to breathe in a stock market where the oxygen supply has suddenly, inexplicably been depleted. In this environment, investors reach out to one another in the invisible ways that investors do, forming a temporary, fragile consensus of convenience - a coalition of the uncertain. Together, they will vent their displeasure at the latest threat to the economy from the Trump White House. Each threat was followed by an investor revolt, then a press conference where investors, anticipating a retreat, looked at Trump expectantly, like graduates waiting to throw their caps. Then came another threat, another revolt, and the cycle continues. Action – Reaction – Retraction. The pattern repeats. 

What about the T+1,360 days left? As for what this pattern from Trump’s first hundred days suggests for investors going forward, if the past is prologue, as the saying goes, then the future is a black hole. In all likelihood, Trump will continue to wield his power of ‘Disrupter-in-Chief’ with the same carelessness as a toddler with a power tool. Eventually, uncertainty will stop being a shock and become the norm. Investors will no longer find it surprising; instead, they'll be surprised that they're still being surprised. This is when they’ll cease forecasting, as tomorrows will feel like todays, todays will feel like yesterdays, and yesterdays pummeled their portfolios without warning. The key to thriving in a world where uncertainty is constant is to confront it head-on and abandon the hope for something better. Don’t let hope turn into a tragedy.

Instead, investors need to incorporate this uncertainty directly into their investment workflow by combining robust optimization with a short-horizon risk model in their portfolio construction process. Given the binary nature of the uncertainty, investors should also make use of both a fundamental and statistical factor risk model in their risk management to ensure they accurately capture all the sources of risk they may be exposed to.

And when investors aren’t revolting against Trump’s latest power-grab, they try really hard to believe that this lack of clarity isn’t a permanent state of affairs, that they can and will be able to reliably forecast again, that America won't be made alone, and that they will have some version of normalcy in the near future. But in the meantime, they will hedge, divest, and stare across the border at Canada with envy, searching for the silver lining, wondering when the perks of having elected a pro-business President will finally kick in.

We now return to our regularly scheduled report.

Last week, markets and investor sentiment rebounded after the 'Retraction' phase of the Trump policy cycle and a 90-day pause in trade tensions. The supply-demand imbalance for risk has eased, except in Europe, reducing the likelihood of overreactions to negative news in most markets. Furthermore, investors will appreciate the resilient (backward-looking) macroeconomic data, though gains may be modest from here due to ongoing uncertainty about the still-to-come effects of tariffs.

Note: green background = bullish, red background = bearish
 
Changes to investor sentiment over the past 180 days for the markets we follow: 

How to Interpret These Charts:

Top Charts:
The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:

• A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
• A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
• A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).

Bottom Charts:
The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:

• When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
• Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.

The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.

Blue Shaded Zone:
The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.