What investors should watch
In the brief time since the US presidential election, we have seen significant market trends emerge:
- US stocks rally—Stocks in general have risen with small-caps far in the lead, gaining 10% in the wake of the election.
- Emerging market weakness—Emerging market stocks have experienced weakness post-election, following relative strength before the election.
- Stronger US dollar—The greenback has risen significantly relative to other major currencies. The ICE US Dollar Index has risen to its highest level in more than a decade.
- 10-year US Treasury yield up significantly—This benchmark yield finished the week at 2.343%, up from 1.7% just a few weeks ago.
- Inflation expectations have increased—The TIPS breakeven inflation rate has risen over the past few weeks. In addition, while still relatively low, the Atlanta Fed Business Inflation Expectations Index is at its highest level in more than a year.
Markets a voting machine in short-term
All of these post-election market moves are presumably in expectation of specific Trump administration proposals coming to fruition. But is this realistic? Before the election we had warned that a Trump victory would likely result in a visceral response in financial markets. But that’s because, as Benjamin Graham long ago explained, markets are a voting machine in the short term. However, in the longer term markets are a weighing machine, which means any longer-term market moves must be supported by actuality rather than expectations.
Different Trump proposals will take varying amounts of time and political negotiation to come to fruition, if at all. However, markets may be in danger of overshooting before then. We could see some thematic plays regress between now and when related Trump policies are actually implemented. But what’s perhaps more important is to contemplate the ramifications of current market conditions.
December Fed hike likely
To start, it seems more likely than ever that the Fed will hike rates at its December meeting. With the 10-year Treasury yield higher as well, borrowing costs have increased and will continue to do so. Mortgage rates have already risen and this could put a damper on the recovering housing market. If we see continued strength in the US dollar, this could create a headwind for parts of the US economy that rely on exports. Large US companies that derive a significant portion of their revenue from outside the US could suffer while smaller domestically-reliant companies could benefit.
And then there’s inflation. Fiscal stimulus along with trade tariffs— especially with the unemployment rate below 5%—could create very significant inflation. That’s especially true if there is any mass deportation of immigrants who will leave behind unfilled jobs. Asset classes that have historically held up well in the face of inflation should have substantial representation in portfolios.
In this unique post-election environment, we are likely to see a continuation of the trends we have already seen in the past two weeks, although they may moderate. But given the uncertainty that comes with this new administration, we need to be prepared not just for these short-term market moves, but also for the longer-term economic consequences of anticipated Trump policies.
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About the Author
Kristina Hooper is the US Investment Strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.
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