Investors changed what they thought about the economy, interest rates, and foreign relations after Donald Trump’s historic election win. It was a very big week on Wall Street. But investors should be careful not to get caught up in market stories that are based on feeling and might not last.
Of course, the election results didn’t just surprise voters, who were mostly hoping for a tie. Also, investors seemed caught off guard, even though so-called “Trump trades,” which are bets on assets that will do well if the Republican nominee wins, have been growing since October.
Market slang for taking profits after an expected event actually happens is called “selling the fact.” But investors piled heavy into those same trades, sending the Dow Jones Industrial Average DJIA 0.59%up by more than 1,500 points Wednesday. This was part of an equity rally that saw even bigger gains for small-cap stocks and sectors that are expected to benefit from Trump administration policies. They also sold bonds, which caused Treasury yields TMUBMUSD10Y 4.310% to rise. Yields move against prices. Rising stocks and rising yields don’t usually go together, which shows how happy people are in the stock market.
What’s going on? It was partly because they were glad there wasn’t a long, heated battle and the result was pretty clear. But there were also some good things about it.
According to Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, the Trump victory turned out to be good for the economy. He told BourseWatch this.
Christopher said it looks like the economy might either avoid a “landing” altogether or have a “soft landing,” in which growth slows but employment stays pretty high. Higher bond yields and higher stock prices as investors prepare for a growing economy and a stronger dollar DXY 0.42% have had the same effect on the market as the Trump trade. The U.S. now looks like the cleanest shirt in a world full of dirty ones.
Investors are planning for faster economic growth after Trump’s win, in part because they expect tax cuts and less government regulation, which will boost stocks. It has also made people worry about rising prices, which has caused bond rates to rise.
“The Trump trade is moving in the same direction as the main trend,” Christopher said. “We’ve seen that a lot this week.”
What could be wrong with that? A sudden and sharp rise in yields can be unstable for stocks. It can make it harder to explain high equity valuations and also make it more expensive for companies to borrow money. That’s because when Treasury rates go up, future cash flows and earnings are worth less right now.
Christopher said that the fact that stock prices and bond yields went up at the same time shows that “people aren’t combining the themes in a way that makes sense.”
After that, Treasury yields went down, showing a weekly drop. Stocks kept going up. The Dow, the S&P 500 SPX 0.38%, and the Nasdaq Composite COMP 0.09% all set new records and had their biggest weekly percentage gains of 2024. The small-cap Russell 2000 RUT 0.71% went up 8.6%, which was the most in a week since April 2020, according to Dow Jones Market Data.
Trump supporters have thrown around huge numbers to talk about possible budget changes. Yields have gone down from their highs in the middle of the week, but many people still don’t see much hope for economic restraint.
“If Republicans keep the House, it’s likely that the Trump tax cuts will be extended in full, but maybe only for a shorter time because of the already high deficits,” said Libby Cantrill, head of public policy at Pimco, in a note on Friday. It might be possible to make small cuts to spending, but it will be hard to get any big cuts through the House and the budget-reconciliation process, which only needs 51 votes in the Senate (or 50 plus the vice president’s tiebreaker) instead of the 60 votes needed to get past a filibuster.
On the other hand, many of Trump’s possible policies are still unknown, especially his planned tariffs, which economists fear would slow down growth and raise prices.
In this time of uncertainty, investors should keep in mind that elections often lead to quick reactions that don’t turn out to be good long-term investment chances. Christopher said, “Reactions are not rotations.”
When the factors change, investors change their exposure to different sectors or asset classes. Reactions, on the other hand, are hasty decisions that often lead investors to buy assets at too high of a price or sell them for too little of a price.
Some stocks, like energy stocks, went up after Trump won the election in 2016, but they went down during the rest of his time, even before COVID-19 started.
Christopher also said that between now and January, it should be easier to see what the new administration’s plans and goals are. For now, there’s a chance that the newest market trends will go too far, too quickly.
