After the Trump rally, will the momentum last?
President-Elect Trumps victory on Election Day served as an inflection point in the financial markets. U.S. stocks have surged in the month since the election, with the major large-cap indexes hitting record highs in late November.
On the flip side, bond prices have dropped with the jump in bond yields. Rates on benchmark 10-year U.S. Treasury notes have climbed in the four weeks since Election Day, from 1.8% to nearly 2.4%. Gold prices are also down over 8% over this time.
Investor trends are clearly rotating, away from relatively safe haven asset classes such as bonds, precious metals and hard assets, and toward riskier assets such as stocks. But how much of this shift is for real?
There has been a lot of emotion in the move toward equities since the election. Investor optimism seems to have turned on a dime as Wall Street largely cheered Trumps pro-business perspectives.
Many investors anticipate market-friendly policies from the incoming Trump administration, including lower taxes and higher government spending on defense and infrastructure. But how much of Trumps agenda comes to pass is for the most part unknown, depending on how much opposition he may face from the traditional deficit hawks among Congressional Republicans.
Seasoned investors know that investor sentiment can often be fickle. Many have seen emotionally charged market rallies fizzle when confronted with reality. Thats certainly could happen in this latest bull market run.
But emotion isnt the only factor driving the divergent paths of stocks, bonds and precious metals. Strong economic conditions are also underpinning the recent trends toward risky assets such as equities and the flight away from the relative safety of bonds and hard assets.
It wouldnt be surprising to see the stock rally lose some steam once investors emotions cool off. But the following factors may help keep momentum moving in the direction of stocks, with an inverse effect in the bond and precious metals markets.
Recharged economic growthAnnual growth for U.S. Gross Domestic Product (GDP) was revised up to 3.2% for the 3rd Quarter. Thats the strongest pace of economic growth since the 3rd Quarter of 2014. Plus, its well above the average quarterly GDP growth of 1.8% since 2015.
Much of the surge in economic activity was attributed to personal spending, including an 11% increase in durable goods orders. Exports also gained at the fastest pace in nearly three years.
The jump in GDP growth is a welcome signal for future expansion, especially after nearly two years of sluggish growth and concerns about economic stagnation.
Easing deflation fearsThe sharp rise in bond yields came as investors reset their expectations about inflation. In recent months, market worries had focused more on the threat of deflation, especially as the trend of negative interest rates swept through the global government debt markets.
Now it appears prices are on the upswing and fears of deflation on the wane. Headline inflation in the U.S. is at a two-year high of 1.6% in October. Recent inflation reports from Japan, China and the Eurozone also showed a trend of rising prices.
Higher prices usually spell bad news for an economy. But after a long spell of little to no inflation, the recent upward pressure may in fact be a positive sign for future global growth.
Job and income gains Employment has been a consistent bright spot in the current economic expansion. Job market growth in November was on par with recent reports, with 178,000 jobs added during the month. The unemployment rate in the U.S. touched a nine-year low at 4.6%, although a drop in labor force participation was a factor in this decline.
Wages and income have been slower to recover, but in recent months both have shown improvement. Personal income rose 0.6% in October, its best monthly gain since April. Average hourly wages declined slightly in October, but were up 2.5% on an annual basis for the month.
Brighter consumer optimismImproving prospects for employment and income tend to make consumers feel more confident about the future and more comfortable about spending money. Both areas have seen rising strength in recent months.
Consumer confidence jumped to a nine-year high in November according to The Conference Board, exceeding many analysts expectations. This confidence was apparent at the nations cash registers, where retail sales grew at an annual 4.3% rate in October 2016.
The rebirth of the consumer is critical to future economic growth, because consumer spending typically represents two-thirds of the U.S. economy. As the job market expands and income grows with the humming economy, higher consumer spending should help keep the momentum going.
What could throw a wrench into the works for this scenario? Again, the risks go back to the uncertainty over Trumps economic proposals. While plans for cutting taxes and ramping up infrastructure spending should provide a boost to the U.S. economy, any improvement could be undercut by his hard line on trade.
Tariffs and other restrictions on global trade may offer relief to some areas of the economy, but it will likely come at the expense of another. President-Elect Trump and his GOP allies in Congress will need to pull off a balancing act between promoting economic growth and protecting the interests of U.S. workers and businesses.
The good news is, they can start from a strong foundation of economic expansion. This will likely sustain current market trends for the near term. But the prevailing risks to the economy require investors to pay some attention toward wealth preservation. The recent dip in precious metals prices is a good opportunity to put a strategy in place at lower costs.
Call your Blanchard portfolio manager today to discuss the current outlook and options that may be right for you at 1-800-764-9135.