Investors are feeling as “pro-US as a bald eagle eating apple pie”, says Luke Kawa for Sherwood News. Bank of America’s latest global fund manager survey shows marked bullishness on US assets and a dismissive attitude to the rest of the world. Yet investors could be repeating the mistakes they made in the president-elect’s first term when many “Trump trades” – from US small caps to a stronger dollar – enjoyed a short pop only to underperform over the full four-year term.
We are sometimes advised to take Trump “seriously, but not literally”, says James Mackintosh in The Wall Street Journal. On Wall Street that has resulted in a pick ’n’ mix: investors are taking the Trump policies they like (tax cuts and deregulation) seriously, while dismissing those they dislike (immigration clampdowns and high tariffs) as just “campaign rhetoric”.
That could prove exactly wrong. Trump needs Congressional support for his pro-growth plans, but can quickly impose tariffs and immigration rules himself via executive order. Trump’s first year in 2017 was marked by chaos and scrapped trade deals – it was only later that he finally gave Wall Street a tax cut present.
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What does US inflation mean for Wall Street?
The inflation that sank Biden’s popularity is now Trump’s problem, says John Mauldin in his Thoughts from the Frontline newsletter. The incoming president’s “basic instinct” to cut government spending is good, but he won’t make the serious changes to welfare policies that would be needed to balance the books. As long as federal deficits stay in the $1.5 trillion range, the new administration will “be dealing with inflationary issues”. US core inflation (which excludes volatile food and energy prices) rose to 3.3% in October. Across a range of statistical measures, “inflation remains above 3%... and is no longer clearly declining”, says John Authers on Bloomberg.
Another headwind is that bond yields are rising. Credit is “meaningfully tighter than many currently working in finance have ever known”. The yield on the US 10-year Treasury Inflation-Protected Security (TIPS), a proxy for interest rates after inflation, is now above 2%. That doesn’t sound like much, but it’s higher than it was for 14 years prior to 2023. Trump isn’t so mad as to pour “fuel” on the “inflationary fire” with massive tariff hikes, says Rana Foroohar in the Financial Times.
But that’s no reason for calm. The US is “way overdue” a recession and big market correction at some point over the next four years. From hidden leverage in private equity to crypto assets that have no lender of last resort, financial risks are mounting. “I think we’ll get a two-year sugar high under Trump,” says Dennis Kelleher of Better Markets, “but down the road, we’re looking at a potentially catastrophic correction – something much worse than 2008.”
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