Trump’s decisive win last week has seen significant shifts in market sentiment. Markets are optimistic that Trump’s tax cuts and deregulation will turbocharge growth. And they might. But what implications will Trump’s policies mean for the US dollar, long-term bond yields and foreign trade? As investors, you need to evaluate both what is seen vs unseen. There will be both opportunities and challenges… however they will be very sector specific.
What Banking Crisis?
Are things actually looking up? If your measure is the equity market… you would say absolutely. Stocks continue to charge higher on the back of lower inflation and optimism the Fed is closer to the end of its hiking cycle. What’s not to like? However, there’s something else giving markets a boost. Easy money! Financial conditions are as easy as they’ve been all year. For example, it was only 4 months ago and we had a mini banking crisis… where funding was a lot tighter. That’s now a distant memory.
Stocks Are Not Cheap
The S&P 500 has had a fantastic first 6 months of the year – up almost 15%. That’s a welcomed relief from the miserable 2022. But are stocks now too expensive? What’s the premium investors are being asked to pay? There are a couple of ways we can assess this. For example, we can compare the earnings yield against the risk free rate of return (currently around 5.5% and going up). And whilst it’s always good to maintain some (long) exposure to the market – we need think carefully about how much (and where)
Could $1.1 Trillion in ‘T-Bills’ Suck Out Liquidity?
Over the weekend, financial media reported a deal in principle to raise the debt ceiling. Based on all reports, the deal sets a two-year spending cap, kicking in October 1. Now if Washington DC agrees to at least slow its spending – they’re likely to be doing it during an economic slowdown. And this could have a near-term impact on economic growth and the valuations of risk assets. What’s more, if Treasury are permitted to issue $1.1 Trillion in fresh T-bills – what will that do to liquidity? Will banks deposits start looking for a (higher return) home?
For a full list of posts from 2017…