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.

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%.