Only a few weeks ago, Hillary Clinton was viewed as the favorable candidate by Wall Street because she represented the status quo. On the other hand, Donald Trump was viewed more warily because of his negative views on free trade and unpredictable behavior. Since the election, there are now more people hopeful that President-elect Trump can bring positive change. According to a new POLITICO/Morning Consult poll, Trump’s favorability has grown 9 points, 37% to 46%.
Wall Street has rallied because President-elect Trump has shown signs of softening his stances on many of his campaign promises, while keeping his pledge of reducing regulations and lowering taxes. Last Monday, all four major equity indices hit all-time highs for a first time since 1999. The Dow hit a new high of 19,000.
The bond market is not viewing Trump as favorable as the equity markets. There has been over $1 trillion in global bond losses, as the 10-year Treasury yield has risen to 2.36% from 1.80%. Global Bonds have not experienced this large a loss in 13 years. The 30-year mortgage rate has risen above 4% for the first time all year. If there was a daily index that tracked home prices, I believe that it might have dropped along with the bond market.
Bond investors are doubtful that President-elect Trump can pay for infrastructure, while at the same time, cutting taxes. It is still unknown which policies will pass and how much that they will be able to stimulate growth. My biggest concern remains with the growth of the global economy. Global stocks have not participated in the rally and for good reason. The dollar reached a high not seen since 2002 because expectations are that the U.S. will grow faster than the world economy. Higher U.S. interest rates are also attractive to foreign investors as overseas rates hover near zero.
President-elect Trump is emphasizing American production and innovation. The slogan “American First” will be key to the Trump presidency. Many U.S. based companies will be pressured to move manufacturing back to the U.S. Trump has already taken credit for keeping a Ford automaking plant in Kentucky and lobbying Carrier air conditioning to remain in Indiana. CEO’s of American businesses are on notice not to move production overseas. Republicans will be creating tax incentives so that U.S. companies will regain a competitive advantage to produce in America.
If the U.S. suddenly shifts towards a more isolated economy, there might be unintended consequences. Over the next 4 years, I believe that your investment returns will be highly dependent on whether or not foreign governments respond negatively to changes in U.S. tax and trade policy.
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