Fears of inflation have returned to the U.S. financial markets as inventors wonder if possible policy changes in President-elect Trump’s second term could cause prices to rise again.
The benchmark 10-year Treasury yield TMUBMUSD10Y 4.411% has gone up about 14 basis points since Trump’s election on November 6. This is because of worries that some of his policies, like more tax cuts and import tariffs, could cause the deficit to grow even more and inflation to return, which would make interest rates go up even more.
After three weeks of bad news, the stock market finally took a deep breath. FactSet data shows that since Trump won the election, the S&P 500 index SPX 0.35% has gone up more than 3%. During the same time period, the Dow Jones Industrial Average DJIA 0.97% went up almost 5% and the Nasdaq Composite COMP 0.16% went up 3%.
Investors are now trying to figure out if the deep-seated anger in Americans over inflation will last in the face of a mix of mixed signs from the financial markets. If you’re interested in how your assets have done since Trump took office in January, here it is.
Oil
“It’s clear that commodities are very affected by prices… “Higher inflation could be caused by a big rise in oil prices in particular,” said Jim Smigiel, chief financial officer at SEI.
Last week, oil futures went up. On the New York Mercantile Exchange, the front month U.S. crude standard climbed by 6.5% to settle at $71.24 a barrel.
But Brian Szytel, co-chief investment officer at the Bahnsen Group, said that Trump’s policies that support energy may weaken the normal link between energy prices and inflation.
Szytel told MarketWatch over the phone on Friday, “…with the new administration coming in and ‘drilling more,’ you’d likely have more oil supply [which could weigh on energy prices], so that normal relationship between oil and inflation would be muted.”
Gold
Gold has been thought of as a way to protect against inflation because it keeps its value even when prices go up. Gold prices went up more than 5% in a week, with the most popular contract, GCZ24 0.22%, ending the week at $2,712.20 an ounce. Dow Jones Market Data says it was the best week for the yellow metal since March 2023.
Analysts in the market said that the recent rise in oil and gold prices was mostly due to rising tensions between Russia and Ukraine. This increased the market’s global risk premium and increased demand for safe assets, rather than inflation worries.
Last week, news sources said that Russia may have fired an intercontinental ballistic missile during an attack on the city of Dnipro in Ukraine. This made things more tense in the world’s politics. Because of this, Western officials have since denied the story. The Associated Press says that if it is true, Moscow would have used this kind of weapon for the first time in the war. On the other hand, on Wednesday, it was said that Ukraine fired missiles into Russia for the first time that were sent by the UK.
Value stocks vs. growth stocks
According to Smigiel at SEI, value stocks have done better than growth stocks in the past during times of inflation. This means that they are a good way to tell if inflation is happening in the stock market.
When inflation hit its highest level in more than 40 years in 2022, U.S. large-cap value stocks did better than growth stocks. FactSet data shows that the Russell 1000 Value Index RLV 0.84% fell 9.5% in 2022, which was more than the Russell 1000 Growth Index RLG 0.14%’s drop of almost 30%.
But Szytel thinks that value stocks are now more appealing than growth stocks. This isn’t because inflation might start up again, but because growth stocks have “become overvalued and dominated so much of the stock indexes.”
According to FactSet, the Russell 1000 Value Index went up 2.4% last week, while the Russell 1000 Growth Index went up 1.7% during the same time period.
Caps for small and big
This is when economic growth and prices rise from below-average levels back to the long-term trend. In the past, small-cap stocks have been among the winners in this trade.
But Smigiel said that the fact that small caps did better than large caps could be an early sign of inflation for the stock market, since high economic growth could cause prices to rise.
So far in November, small-cap stocks have been flying high. This is because investors think that Trump’s plan to cut taxes and bring supply chains back to the U.S. will finally help smaller companies that are based in the U.S. FactSet data shows that the Russell 2000 index RUT 1.80% went up 4.5% last week, while both the large-cap S&P 500 and the tech-heavy Nasdaq Composite went up 1.7%.
There is still too much time to tell how taxes will affect the prices of assets.
The chief investment officer at BNY Wealth, Sinead Colton Grant, said it’s “far too early” to say that tariffs will lead to “significantly higher inflation,” and the signals from the financial markets are “not terribly clean from an asset class perspective.”
“It would be very surprising if the next administration adopted policies that would be highly inflationary,” she told MarketWatch in a phone interview on Thursday. “This is because all signs point to the fact that one of the main reasons the American people voted the way they did was their concern about the cumulative price increases over the last four years.”
In the meantime, Wall Street thinks that the next important event for the markets this short Thanksgiving week will be Wednesday’s personal-consumption-expenses price index. This week’s inflation report won’t show how Trump’s policy changes might affect the market, but a higher-than-expected reading could hurt market mood and stop the stock market from rallying at the end of the year.
Retailers are making money before the markets close for the holiday in the U.S. on Thursday and early on Friday. On Tuesday, Best Buy Co. Inc. (BBY 3.50%), Dick’s Sporting Goods Inc. (DKS 4.23%), Macy’s M (8.16%), and Nordstrom (JWN 3.89%) are all likely to report their earnings. Big names in tech like CrowdStrike Holdings Inc. (CRWD 4.11%), Dell Technologies Inc. (DELL 3.81%), and HP Inc. (HPQ 0.58%) will also report this week.
