It’s been two weeks since the election and it is pretty clear what the stock and markets think will happen under President-elect Trump – faster economic growth from spending on infrastructure and significant cuts in the corporate income tax rate, as well as making it more attractive for companies to bring home the $2 trillion in cash they have parked overseas.
The bond market is also pricing in the broadly hinted at December increase in rates by the Fed, a growing indication that inflation is starting to increase slightly and that inflation will be given a significant boost if President-Elect Trump follows through on promises to raise tariffs significantly on some goods and to renegotiate the NAFTA and TPP trade accords. We can only hope that what he does is less than he promised on foreign trade, as it would be both inflationary and harm U.S. manufacturing growth as countries retaliate by raising tariffs and shop elsewhere for foreign-manufactured goods.
Of the bond market sectors, long treasury bonds, mortgages and municipal bonds have sold off the most, and it has been a very sharp move for a two-week period. High yield bonds have held up well, as they benefit from better economic growth. How much higher rates go largely depends on the changing market forecast for what Trump actually gets done.
The stock market moved up suddenly with the election results, up 4% the first week and 1% last week and is starting off the new week well. Thanksgiving week tends to be stock-market friendly.
One stock sector that jumped a great deal was financials. Bank of America jumped roughly 20% in a few days. That was is based on the hope that some of the enormous Dodd-Frank bill and attendant regulations will be negated and that higher rates will lead to higher spreads (profits) on lending. Near-zero rates have been killers for bank profits and the cost of complying with Dodd-Frank has been huge.
Out-of-favor, deeply cyclical companies like Caterpillar also had a great last two weeks, mainly on improved forecasts for world economic growth. Rolling back many Obama-era regulations as promised (a stroke of the Trump pen will wipe away a stroke of the Obama pen) would help businesses of all kinds. However, raising tariffs could really hurt some of these. Value-oriented funds, which often look for out-of-favor companies have done best, especially those investing in midsize and smaller companies.
So, the question is, will these trends persist? You will see what institutional investors think simply by watching the markets, both stock and bond.
The bond market is hard for most people to follow because there are so many sectors. The simplest broad proxies for most investors are large, broadly invested funds like PIMCO Total Return (PTTRX) and Metropolitan West Total Return (MWTRX). A falling share price normally means rising interest rates, or at least an increasingly confident forecast for that. Be aware that some funds may have a big one-day drop in price if they make a year-end tax distribution before year-end.
My personal opinion is that President-Elect Trump will get the cut in corporate taxes and reducing the penalty on bringing overseas cash home. Infrastructure spending will also likely get done. While that will take time to hash out, the Democrats are receptive to increased spending on infrastructure, although more conservative Republicans will push back based on the effect on the nation’s debt.
Tariffs are less predictable. We don’t know how much is pre-negotiation bluster, whether tariffs will actually rise, exactly which ones, how and when. It does appear that China is already seizing the opportunity generated by all the talk from Trump by moving on trade deals with Asian countries. China has considerable advantages in speed from a more authoritarian decision-making process and receptivity from not attaching required reforms as strings like the U.S. does.
The fly in the ointment is Trump’s insistence on spending so much early political capital on immigration issues. The more he concentrates on those, the less likely other things get done and the more likely that they get delayed. The next 3-4 months should continue to be very interesting.