Today may be the first day of July, but November is on many investors' minds following last week's presidential debate. Bond yields tell the story.
The rematch that few people wanted between President Joe Biden and former President Donald Trump looks likely to play out in November, and that means markets are scrambling to get ahead of the eventual outcome.
"Post-debate, Trump seems to have received a meaningful bump," writes Citi's Jabaz Mathai. "We think that yields will be at risk of continuing the move higher from this week on expectations of tax cuts and higher Treasury supply with a Trump White House, with any tempering effect dependent on economic data."
It is a valid hypothesis. The stock market did well during Trump's term -- up until the pandemic-related recession of 2020 -- and there are plenty of investors who expect that to play out again. Or as Ironsides Macroeconomics Director of Research Barry Knapp puts it, at the moment "the Trump trades, long financials, energy, healthcare, merger arbitrage, stronger trade-weighted dollar...are likely to gain momentum."
Yet stock gains are likely to come with plenty of volatility: A lot can happen between now and November, and some choppy trading wouldn't be shocking following a roughly 15% gain for the S&P 500 in the first half of the year. Furthermore uneven economic data and ongoing geopolitical tensions could also bolster volatility.
Those factors, along with a more mature business cycle, leave Morgan Stanley's Michael Wilson wary of small-cap and lower quality cyclicals, even though they thrived during the Trump administration and "market expectations for fiscal expansion, reflation, and less regulation under a Trump Presidency" drove their -- and Treasury yields' -- post-debate rise.
By contrast, there seems little to weigh on bond yields (which move inversely to prices).
Yields are climbing yet again -- even in the face of a benign personal-consumption expenditures, or PCE, price index reading for May out Friday morning. Previously, investors might have expected bond yields to fall after such a reading. After all, cooling inflation could give the Federal Reserve more cause to lower interest rates sooner rather than later.
Yet the specter of Trump winning the White House again is keeping yields high -- yields on the 10-year T-note were around 4.84% at recent check -- given his first term was marked by reflationary tactics, from tariffs to tax cuts.
"We are looking at the potential for higher longer rates and a steeper yield curve," writes NatAlliance Securities' Andrew Brenner. "That is what the Trump dogma points to."
Those reflationary tactics were welcome during Trump's term -- as evidenced by stocks' gains -- but today the situation is much different, given inflation is already a major headwind to consumers in a way it wasn't prepandemic. Nor does it dovetail with hopes of interest rate cuts from the Federal Reserve, which has repeatedly emphasized its commitment to taming inflation as its top priority, regardless of the secondary impacts of tighter economic policy.
In short, it is why a second Trump term could be a positive for stocks, but many investors feel higher yields are a surer bet.
"We are moving into a period of more uncertainty for equities but far more certainty around sustained protectionist policies (both Trump and Biden made that very clear Thursday evening) and a far higher inflation era relative to the 2010-2020 regime," writes Bear Traps' Larry McDonald.
No wonder the bond market is feeling the chill in the middle of summer.
