The Trump Trade Roiled Markets
Dear subscriber,
Every nation gets the government it deserves.
At least, that's what 19th-century philosopher Joseph de Maistre once said (though the exact quote is often misattributed to political theorist Alexis de Tocqueville).
The statement is part hopeful... part warning. And it's true.
It's up to you whether you consider it a blessing or a curse this week.
Either way, we have a clear winner, little unrest, and can now move past politics to focus on building our wealth in the coming years.
Over the long haul, presidents don't matter much to markets.
But there are, of course, short-term reactions. So let's do a roundup of which assets have moved this week on Donald Trump's victory and do our best to parse out why...
We'll show everything as a one-year chart to put some perspective on the moves, starting with bonds.
Bond prices fell this week, while yields rose. As you can see, the yield on the 10-year Treasury is now up to 4.4%...
This is undoubtedly the most consequential price move from Trump's election.
Trump plans to spend money and put tariffs on imports. Both moves risk spiking inflation, so bond investors demand higher yields to compensate.
On that front, expectations for inflation – as measured by what are called "breakeven" inflation rates – are rising sharply...
Now, let's move on to the stock market...
After Trump's 2016 victory, stocks soared. They're up again this time around.
It makes sense that stocks would rise. Between the promises for lower taxes, higher spending, and looser regulation, markets expect Trump to be business friendly.
However, higher bond yields would typically drag stocks down... because bonds look more attractive with a higher yield.
These are two competing trends, and one will likely have to lose steam soon.
Within the S&P 500 sectors, real estate and consumer staples have fallen. Utilities have lagged as well... That flows from interest-rate moves, as those are rate-sensitive sectors.
Health care is the next-worst performer. Trump has said he plans to give Robert F. Kennedy Jr. a role in his administration, and Kennedy is notoriously skeptical of the health care system.
More specific to Trump's policy, financials, industrials, and energy have all risen on expectations for lighter regulation.
In the currency market, the dollar is soaring...
Trump's proposed tariffs will reduce imports and drive demand for domestic goods. This, in turn, will increase demand for the dollar. The dollar is doing particularly well today against currencies like the Mexican peso and the Chinese yuan.
Gold, on the other hand, fell a bit...
Folks may have bought gold as a chaos hedge ahead of the election, in case of civil unrest – which we haven't seen so far.
But more likely, this is a simple reaction to Treasury rates heading higher. When you can earn more in bonds, gold – which offers no yield – looks less attractive.
In the crypto market, bitcoin broke out to a new all-time high...
In 2021, Trump called crypto a scam. But he recently came around... and is now in favor of easing crypto regulations. Perhaps that was just a campaign tactic to gather votes.
Either way, it looks like the end of Gary Gensler's run as chair of the U.S. Securities and Exchange Commission.
Gensler has been notoriously hard on the crypto industry. So Trump, who has promised to make America the "crypto capital of the world," is likely to push for his removal.
This is all to say that markets are good at making predictions... If you want to get a handle on the next four years, we recommend you focus on understanding the signals in asset prices rather than listening to campaign promises.
On a final note, I'll leave you with a few words of wisdom from our friend Bill Bonner, of Bonner Private Research, to help make sense of the political world today.
In an article published on Wednesday, Bonner noted that there's a "Primary Political Trend" at play here. And much like de Maistre (who we talked about at the beginning of this essay), Bonner notes that it all comes down to the people.
The people – not the politicians – set the broader trends. And the politicians follow along...
"There are tides in the affairs of men," wrote Shakespeare. Just as there are "Primary Trends" in markets... there are tides in politics, too... powerful currents that have a life of their own. These deep currents are not driven by what people want or what they think; instead, like an unrelenting river, they carve the valleys, shape the stones, and erode the shorelines of human thought.
And now... in what direction does the water flow? Whatever it is, the president is elected to follow, not to lead. He drifts with the Primary Political Trend; he doesn't create it.
What Our Experts Are Reading and Sharing...
How badly did Kamala Harris do in this election? Very badly. Compared with 2020, about 90% of the counties with completed results have shifted in favor of Donald Trump. And that's across different types of counties, too – urban counties and suburban counties... counties with young populations and counties with older populations. Check out the map and the last table in this New York Times analysis.
Alex Tabarrok, a Libertarian-leaning economics professor, outlined a best-case scenario for a Trump presidency in his blog Marginal Revolution. In a post published earlier this week, Tabarrok translates Trump's promises into specific policies that make economic sense to see how they'd look if he followed through.
Control of the House of Representatives hasn't been decided yet. But it's looking like a clean sweep for Republicans. Election-betting markets did a good job predicting winners this year... and on Polymarket, they say there's only a single-digit chance for Democrats to take the House.
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Until next week,
Matt Weinschenk
Director of Research
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