The markets continue to digest what the second Trump administration will mean for the financial markets. To this point, the markets have performed about how you might expect post-election. While there’s been some volatility along the way, small-caps have led the market higher. Cyclicals, including financials, industrials and energy have been outperforming the S&P 500. Bitcoin has rallied strongly. Treasury yields have moved higher. All of this is relatively similar to the market’s reaction in 2016. There’s one big difference this time around though - that stubborn issue of utilities and gold also outperforming large-caps. We didn’t see anything remotely resembling that in 2016 (utilities lagged the S&P 500 by more than 3% and gold lagged by 15% for the remainder of November following election day). That sure suggests to me that there’s a risk-off undertone to this market and that’s probably being driven by the prospect of higher inflation again in 2025.
President-elect Trump didn’t do anything to calm those fears this past week by announcing an aggressive approach to tariffs, targeting China, Canada and Mexico. This will accelerate inflationary pressures to a yet-unknown degree, but it’s clear at this point that Trump is interested in force feeding his agenda to the world. By many measures, inflation is already moving higher again all across the globe. Most governments seem interested in avoiding any kind of protracted trade war given the negative implications for consumers, but it seems unlikely at this point that a trade conflict will be avoided altogether. Since rising inflation almost always affects risk asset prices, this could be a stiff headwind for stocks in 2025.
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