Moneycontrol Pro Weekender | US stocks welcome Trump, but bonds do not

view original post

Many commentators have drawn attention to the disconnect between the reaction of the bond and stock markets and have wondered whether stocks can continue to rally in spite of high bond yields

Dear Reader,

At the press meet after the US Fed decision to cut the Fed Funds rate by 25 basis points, Jerome Powell said the US economy is in good shape and inflation is easing. He also said, though, that people are still feeling the effects of high prices. That ties in neatly with one big reason advanced by many commentators for the Trump triumph –high prices. While economists are fixated on the inflation rate, ordinary people are more concerned about prices being already high and therefore eating into their budgets, rather than whether the rate of change in the overall price level has come down.

Story continues below Advertisement

Powell’s remarks about the economy looking good also contrasts with the message that US voters delivered. This FT article, free to read for Moneycontrol Pro subscribers, pointed out: ‘“It was the economy first, second and third,” said leading Democratic pollster Jefrey Pollock. “How do you win when so many voters think that the country is on the wrong track? And when the voters say wrong track, they are really complaining about the economy.”’ In similar vein, FT columnist Ruchir Sharma wrote, “US growth is a mirage for most Americans, driven by rising wealth and discretionary spending among the richest consumers, and distorted by growing profits for the biggest corporations.’’

Perhaps Pollock’s blind spot on the economy reflects that of the Democrats. Perhaps it’s simply that high prices have hit the masses hard, thus colouring their views about the economy. It’s no coincidence that the affluent were the only section of the population where support for Harris was higher than for Trump.

The key question, of course, is what will be Trump 2.0’s policies. There is a big gulf between election rhetoric and the hard realities of policy making, but maybe some clues can be gleaned from the price action in the market. The US stock market has reacted euphorically, with both the S&P 500 and the Nasdaq at record highs. The market clearly expects that Trump’s agenda of tax cuts and deregulation and his general pro-business stance will boost growth.

Powell believes that it is strong growth that has led to a sharp rise in long-term US bond yields, rather than fears of a resurgence of inflation. Indeed, the rise in mortgage rates may be a reason why the central bank chose to remain dovish, as it could slow growth. Another reason could be that with falling inflation, real interest rates are getting higher.

The fact is that while everybody is talking about how Trump’s policies will lead to a higher fiscal deficit and higher inflation, there is little clarity on his strategy so far. If high prices are what felled Harris, why would Trump want to go down that road? Recall that Donald’s buddy and bankroller Elon Musk had said he would slash government spending. Indeed, one reason why the long-end of the yield curve has gone up is precisely because investors are demanding an additional yield for taking on the risk of long-duration securities. In other words, the term premium has gone up, because the future has become murkier. Indeed, although the Bank of England cut its policy rate by 25 basis points this week, it also said future reductions were likely to be gradual, as it saw higher inflation and growth after the new UK government’s first budget. As this FT article said, “If Trump is serious about his economic proposals, a more troubled period lies ahead for central banks.’’

Could we have a more apocalyptic scenario, if Trump’s bite is as bad as his bark? After all, he will very likely have a free hand in pushing through what he wants, with both the Senate and probably also the House of Representatives backing him. Edward Luce’s piece in the FT said, “Trump has a mandate to overhaul the US in unimaginably disruptive ways. There will be no going back from the seismic outcome of America’s 2024 election.’’ MC Pro columnist Vivek Kelkar underlined that Trump faces a world where the risks are far higher than during his first term in office, and his actions could be far more consequential. He calls it a paradigm shift in the existing global order. The IMF has flagged protectionism and geopolitics as downside risks to Asia-Pacific economies.

Story continues below Advertisement

At the moment, though, the US equity market seems to be factoring in all the growth supporting Trump policies and none of those that would harm the economy. Many commentators have drawn attention to the disconnect between the reaction of the bond and stock markets and have wondered whether stocks can continue to rally in spite of high bond yields.

We had pointed out here that, in spite of initial skittishness in the stock, bond and forex markets after Trump’s win in 2016, they soon settled down. And this FT article says investors should ignore the election noise. Our research team wrote here that rather than basing their investment decision on the US poll outcome, Indian investors should buy high-quality, well-researched ideas on declines.

We naturally had a torrent of articles on the likely impact of a Trump presidency on the Indian economy, on specific sectors and on the Indian markets. We said Indian IT and Pharma could gain from a Trump presidency despite higher trade barriers; that US corporate tax cuts could boost IT demand; that Indo-US ties have grown smoothly over time and the bonhomie between Trump and Modi could only aid that process; and that a Trump victory is good for India.

On the other hand, there were more cautious takes that said IT companies may have to face tougher H-1B visa rules; that there would be no big gains for the Indian economy; while market guru Shyam Sekhar said the Indian markets have a steep wall of fear to climb.

Also, my colleague Anubhav Sahu analysed in detail the contradictions between Trumponomics 2.0 and the Fed, and how Indian investors should position themselves.

Cheers,
Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

M&M, Tata Steel, Trent, Why the largest private sector bank cannot be ignored, Blue Star, Niva Bupa Health Insurance IPO, Jindal Steel & Power, Titan, Colgate, Swiggy IPO, Acme Solar Holdings IPO, Tata Power, Voltas, Ami Organics, Sagility IPO, Why investors should back this NBFC amid overall quality stress, CAMS, Berger Paints