MW Wall Street believes stocks will keep climbing on Trump victory - but here's what could potentially hurt them
By Joseph Adinolfi
Rising Treasury yields are making some bulls increasingly nervous
Many on Wall Street expected Tuesday's election would be the final obstacle standing in the way of a stock-market melt-up heading into the end of the year.
So far, Wednesday's euphoric rally has only helped to harden this view. But as stocks moved higher, some investors expressed concerns that an intensifying selloff in the bond market might soon bleed into equities, potentially leading to trouble ahead.
Their fear is that the lower bonds go, the higher yields rise. And rising yields tend to be anathema to stocks, especially when benchmarks like the S&P 500 are as richly valued as they are today.
See: Here's what can stall Trump's tax and tariff plans
"While gains in equities will garner much attention and their appreciation in price has a more immediate impact for many people, the situation with interest rates is what I will be watching in the coming weeks and months," said JJ Kinahan, chief executive of IG North America and president of Tastytrade, in comments emailed to MarketWatch.
Kinahan warned that rising yields could make it more expensive for companies to finance both their operations and stock buybacks that help to keep markets aloft.
Inflation expectations push yields higher
Seemingly unstoppable momentum has helped propel the S&P 500 SPX and other U.S. equity indexes to a series of record highs in 2024. But history shows that during election years, stocks have tended to finish up strong once the vote has passed.
Many investors and strategists, including Fundstrat's Tom Lee, have cited this historical pattern as a key reason why the rally can keep on running in the weeks ahead.
Others, including Nomura's Charlie McElligott, have hit upon another development that could help propel stocks higher. A postelection "volatility crush" could entice sophisticated systematic traders to pile back into the market.
The Cboe Volatility Index VIX, Wall Street's premier volatility gauge, was already sharply lower on Wednesday. The gauge tends to fall when stocks climb.
As enticing as these reasons might seem, investors shouldn't ignore the rise in yields, which have climbed sharply since the Federal Reserve delivered its jumbo interest-rate cut in September.
On Wednesday, the 10-year yield BX:TMUBMUSD10Y was up 14 basis points at 4.434%, on track for its biggest jump of the year. The benchmark yield has risen more than 80 basis points since hitting its 52-week low on Sept. 16, the day before the last Fed meeting, Dow Jones Market Data showed.
While rising yields haven't had much of an impact on stocks so far, that could soon change, said Logan Moulton, portfolio manager at Waterloo Capital. Of course, whether or not it does could depend on how Trump decides to pursue his policy agenda, as well as whether Republicans also gain control of the House.
Bond traders are worried some of Trump's signature policies, including tariffs and tax cuts, could be inflationary.
"It's that uncertainty of where does inflation go. Trump's policies might be great for growth in the short term, but if you're slapping 60% tariffs on China and cutting taxes at the same time, what is that going to do to inflation?"
A key gauge of bond traders' inflation expectations known as the 10-year breakeven inflation rate also moved sharply higher, lending credence to the notion that price pressures were chief among their concerns, Moulton said.
Some, including Ed Yardeni of Yardeni Research, have also blamed frustrations surrounding the U.S.'s seemingly unsustainable deficit spending for reawakening the "bond vigilantes" - that is, investors who dump bonds to protest freewheeling government spending.
To be sure, Moulton expects that "Trump trades" like small caps, energy and financials could continue to rally into the end of the year.
But once the calendar page turns, a reckoning could arrive.
"Keep watching the long end," Moulton said during an interview with MarketWatch on Wednesday. "The euphoria is going to wear off; I just don't think it's going to wear off in the short term."
Bob Elliott, chief investment officer at Unlimited Funds and a former executive at hedge fund Bridgewater Associates, pushed back on the notion that Trump's policies would deliver a guaranteed boon for stocks.
Elliott said investors who have bought into this idea were overlooking serious risks.
"You're talking about macro policy that's inflationary, a tax hike for the middle class with a high propensity to spend, and larger fiscal deficits that are going to put a lot of pressure on the long end of the bond market," Elliott said. "That's not a great mix for growth ahead."
To be sure, concerns that a Trump presidency could trigger a selloff in stocks have proven overblown in the past. Stock futures initially sold off on election night in 2016 as it became clear that Trump had bested Democratic rival Hillary Clinton.
But they soon turned higher, and between Trump's inauguration in January 2017 and his departure from the White House in January 2021, the S&P 500 had risen 70%, according to FactSet data.
Stocks saw broad gains on Wednesday, with the Dow Jones Industrial Average DJIA up 1,470 points, or 3.5%, and on track for its best post-Election Day performance since 1900, according to Dow Jones Market Data. The S&P 500 was up 2.4% and poised for its biggest post-Election Day advance on record, while the Nasdaq Composite COMP was gaining 2.8% and headed for its best post-Election Day showing since 2020.
-Joseph Adinolfi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 06, 2024 14:39 ET (19:39 GMT)
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