My grandmother is 105 years old. In her 90’s, she could name every single U.S. president. I never thought she would be adding Donald Trump to that list. I must have inherited my love of history from her. I’ve read over 30 presidential autobiographies. And yes, I hope to also be able to name all the U.S. presidents in my 90’s.
This week, $1 trillion of value was wiped from bonds, while global stocks gained $1.3 trillion. Investors scrambled to re-balance portfolios from the ‘Clinton’ portfolio to the ‘Trump’ portfolio. For those investors in a U.S. balanced portfolio, this week was almost a wash. The table below shows the weekly change of the potential winners and losers of a Trump presidency.
These wild moves in the market may prove to be premature as actual policy remains uncertain. President-Elect Trump doesn’t even know yet what he is going to be able to accomplish. I believe that a Trump presidency just increased the level of risk in investors portfolios, but also the potential for higher returns. Donald Trump‘s win on Election Day is no different than Britain’s stunning vote to leave the European Union. This global movement towards more isolationism will continue to spread globally. I expect more global uncertainty as this movement continues to unfold.
In September, Trump said that the Federal Reserve’s ultra-low interest rates created a “false economy” and that “at some point the rates are going to have to change.” He pointed out that the Fed’s policy created a speculative stock market bubble. Trump is going to have to change this rhetoric if he wants to accomplish his agenda. This week, the 10-year Treasury yield jumped the most in 3 years from 1.82% to 2.12%. The hope is that interest rates will remain low as overseas buyers step in to buy our Treasuries because their rates are closer to zero. Bond investors fear that his plan to stimulate the economy could result in a balloon to the budget deficit and an increase in inflation.
In the past, Congress has been reluctant to challenge the bond market’s power. James Carville, who was the lead strategist for President Bill Clinton, coined one of the best quotes that summarizes this point,
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter,” he said. “But now I would like to come back as the bond market. You can intimidate everybody.”
I believe that the only thing in the world that can intimidate President-Elect Trump, is the bond market. His entire agenda from cutting taxes for corporations, changing the tax code, building walls, removing trade agreements, creating massive infrastructure spending, forcing companies to build factories in the U.S, and adding tariffs will not only need a check written by Congress, but it will also need the bond markets approval. The early vote from the bond market isn’t looking positive. If interest rates rise sharply, Trump’s vision of a “false economy” better morph into a “real economy”, or the stock market will have disappointing inflation-adjusted returns in the years ahead.
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