LARRY KUDLOW: Will free-market capitalism, Trump style, come to Davos?

Manufacturing and industrial production are accelerating, with consumer goods output rising at roughly an 8% annual rate over the past two months and business equipment up about 7% (over 10% year-over-year). The Atlanta Fed GDPNow estimate is 5.3% for Q4 2025, core retail sales are up more than 5% year-over-year, core CPI rose 1.6% annual in Q4, wages are outpacing inflation, and unit labor costs are rising only about 1%, all cited as evidence of a pro-growth recovery attributed to tax cuts, deregulation and energy policy; the piece also notes a narrowing trade gap and a declining federal deficit. These data-driven claims support a bullish growth narrative that could influence investor positioning, though the article is opinionated political commentary rather than a new official data release.

Analysis

Market structure: A sustained Trump-style growth impulse (manufacturing up ~7–8% annualized; Atlanta Fed GDPNow ~5.3%) favors cyclicals — industrials (capital goods), materials, transports, energy and regional banks — while hurting long-duration growth and defensives as yields reprice. Domestic reshoring and tariffs lift pricing power for US manufacturers but can raise input costs for multi-national supply chains, benefitting firms with localized production (CAT, DE) and disadvantaging import-dependent retailers. Cross-asset: expect curve steepening, T-note underperformance, dollar strength vs EM FX, higher crude and industrial metals sensitivity, and compressed equity volatility initially as growth beats but rising rates later lift option premia.

Risks: Tail scenarios include aggressive Fed tightening if wage-driven CPI reaccelerates (2s/10s move >75bp in 3 months), trade escalation that sparks input inflation, or a fiscal-government shock raising deficit premia and risk‑free rates. Immediate (days) risk is data-driven repricing around CPI/PCE; short-term (weeks–months) is earnings guidance and capex cadence; long-term (quarters) is sustainability of demand once inventories normalize. Hidden dependency: capex-led growth can be lumpy and front-loaded; a one-time tax/tariff boost can produce transient GDP spikes but leave margins exposed.

Trades: Favor selective cyclicals — establish 2–3% long in XLI and overweight CAT (1–1.5%) and DE (1%) for 6–12 months; reduce TLT exposure by 50% and implement a 1–2% 2s/10s steepener via futures if 10s yield >3.8%. Pair trade: long KRE (regional banks) 2% vs short XLK 1.5% to capture rate/earnings rotation; buy 3-month 5–10% OTM put spreads on QQQ (0.5–1% notional) as asymmetric downside protection. Use covered-call overlays on XOM/XLE to monetize elevated energy cash flows.

Contrarian view: Consensus may be underpricing tariff-driven input inflation and overestimating persistence of high productivity; unit labor cost reprieve can reverse if wage gains broaden, forcing Fed hikes and compressing multiples. Historical parallels (early 1980s fiscal expansions followed by tightening) warn that initial growth spikes often precede rate volatility; if 2‑yr yields cross 4.5% or monthly CPI surprises >+0.4% three times, unwind cyclicals and rotate back to quality defensives.

Key Decisions for Investors

• Establish a 2–3% tactical long in XLI (industrial ETF) and allocate direct stock positions: CAT (1.5%) and DE (1%) for a 6–12 month hold to capture capex/manufacturing upside if quarterly GDP prints >4%.
• Reduce long-duration bond exposure: cut TLT allocation by ~50% and implement a 1–2% 2s/10s steepener via futures (go long 10s/short 2s) if 10‑yr yield breaches 3.8%—exit if 2‑yr yield >4.5%.
• Implement a relative-value trade: long KRE (regional bank ETF) 2% and short XLK (tech ETF) 1.5% for 3–9 months to capture rate-driven earnings rotation; trim if KRE underperforms by >8% vs XLK.
• Buy 3‑month 5–10% OTM put spreads on QQQ sized to 0.5–1% of portfolio as an inexpensive asymmetric hedge; fund by selling 1–2 month covered calls on XOM/XLE to harvest energy carry.
• Set explicit entry/exit triggers: enter cyclicals after two consecutive monthly economic prints (GDPNow or ISM) >4% or core CPI <2.5% for two months; unwind on sustained CPI upside surprises (+0.4% m/m x3) or 2‑yr yield >4.5%.