Characteristically, stocks and bonds rendered diametrically different verdicts on Donald Trump’s victory in last Tuesday’s presidential election. While the Dow Jones Industrial Average enjoyed its biggest rally in five years, jumping 5.4% or 969.38 points to close at a record high of 18,847.66, yields on 10- and 30-year Treasuries jumped 32 and 34 to 2.15% and 2.94%, respectively. The S&P 500 jumped 3.8% on the week to 2165.45 and the Nasdaq Composite Index rose 3.79% to 5237.11.
While global equities added $1.3 trillion in value, however, global bonds shed $1.0 trillion according to Bloomberg estimates. President-elect Trump is expected to bring higher GDP and corporate profits, which are good for stocks, but also higher inflation and interest rates, which are bad for bonds. Bonds were already toxic, offering negative real (inflation-adjusted) returns, before the election; now investors are going to see exactly how much damage feckless central bank policies inflicted as the $1 trillion of losses of the last week are just a small down payment on what is coming.
Mr. Trump is inheriting a complicated and very volatile situation.
And if I were advising him, here’s what I’d suggest.
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Welcome to Election Day 2016. I for one am unable to conjure any emotion other relief that it’s over.
There will be plenty to read and watch today, so let me keep this very short.
- Through last Friday, the markets looked into the eyes of the presidential election and blinked. The S&P 500 ended last week with its longest losing streak since 1980, closing down for nine consecutive trading sessions, ending the week at 2085.18, up only 2.02% for the year.
- However losses were a relatively modest -3.1% during this period, so while investors had been clearing out of the market before Tuesday’s election, they had been doing so in an orderly manner.
- To place the recent loss in perspective, the S&P 500 has lost a greater percentage in a single trading sessions 295 times since 1928 than it has since it started thinking that it might have to utter the words “President Donald J. Trump” on the morning of November 9th.
- Then on Sunday, FBI Director James Comey let Hillary Clinton off the hook for a second time. This set off a giant rally on Wall Street with the S&P 500 closing up over 2%. Markets have long favored a Clinton presidency on the basis that the Devil they know is better than the Devil they don’t.
- It also looks increasingly likely that Republicans will maintain control of the Senate, which gives investors comfort that if Mrs. Clinton does pull off a victory, she will not be able to raise taxes or push through her anti-business agenda.
- We will learn today if markets got ahead of themselves on Monday. Trump still has a narrow path to victory through Florida.
- If Trump wins today: As I explained yesterday, equities could sell off sharply as investors wrestle with an outcome that was not priced in to the market. In that case, we can expect many of our favorite short positions to head straight down.
- If Clinton wins today: The relief rally that many expected may continue but likely not for long as her victory sends the country straight into political paralysis and constitutional crisis that leaves us vulnerable to geopolitical and economic threats.
- Either way: Since market valuations are already extended, any sell-off could be serious until cooler heads prevail.
My Full Election Day Market Analysis
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