The election of Donald Trump sent risk asset prices soaring on Wednesday, but continued into Thursday and Friday, suggesting there’s no letdown in sentiment and investors remain optimistic about U.S. economic potential in the coming years. Trump touted tax cuts, deregulation and other business-friendly policies as part of his platform and, just like in 2016, the markets have reacted positively. Trump trades, including financials, crypto, oil & gas and reshoring, did especially well.
If we use 2016 as a roadmap, there’s certainly the potential for another sustained rally in equity prices here. It could even mark the return of small-caps, which have thus far struggled to pick up any meaningful momentum relative to large-caps, save for a few brief periods, over the past two years. Tax cuts and deregulation should especially benefit smaller and more debt-needy businesses and we saw that reaction in Wednesday’s rally. Carry-through, however, has been an issue and we might still see investors pivoting back to the magnificent 7 names as a safety valve. If some of Trump’s economic policies get passed relatively quickly, we could see the best set of conditions for small-cap outperformance in years.
The Fed, as expected, cut rates by a quarter-point, but didn’t really offer up anything we didn’t already know. The biggest takeaway might be Powell saying that he won’t resign as Fed Chair even if asked to by Trump. The Fed effectively confirmed that it plans on staying the current course, but there are a lot of unknowns that will come with a second Trump presidency. Several proposed policies are inherently inflationary and that could derail the Fed’s plans to ease conditions (the futures market has already removed two quarter-point cuts from its expectations over just the past month). At this point, I don’t think it’s safe to assume that the Fed will cut by another 125-150 basis points over the next year even if it’s the base case scenario in the minds of many.
I’m very worried by what we’re seeing in the Treasury market.
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