The METAR is only a short-term weather report but we should also look at what may come next in the longer term since most of us are long-term investors. Needless to say, speculation about the long term is about as accurate for investing as it is for the weather. Even the Federal Reserve regularly makes serious errors (for example, saying that “inflation will be transitory” in April 2021 but admitting an “OOPS” in November 2021).
I wrote a few days ago about the timing of actions by the President and Congress. The strong reaction of the stock, bond and crypto markets to the election may be temporary. It’s hard to say whether they will continue or reverse and in what time frame.
https://www.wsj.com/finance/investing/trump-election-trade-markets-a29100cc?mod=finance_lead_story
For What Comes Next in Markets, Look Back to 2016
Selecting which Trump trades turn into Trump investments is just as difficult this time around as it was in his first term. The right bets might seem obvious now, but they did back then, too
By James Mackintosh, The Wall Street Journal, Updated Nov. 9, 2024
…
Clampdowns on immigration and high tariffs would hurt the economy, while lower corporate taxes and less regulation would help economic growth and stock prices…
it is much easier for Trump to implement the stuff markets don’t like than to cut taxes and regulation. He can quickly impose tariffs and limit immigration with executive orders, even if he is highly unlikely to follow through literally on using the army to round up illegal immigrants for deportation. Cutting taxes needs Congress—where the House election outcome remains uncertain, although looks likely to go Republican—while regulatory moves are sure to be challenged in court…
Tax cuts are inflationary and pile on even more government debt, which should lift stocks and Treasury yields. Removing bad regulation should raise productivity, which increases growth without inflation and pushes up Treasury yields, while lowering the cost of compliance is great for stocks… [end quote]
The Fed’s next moves are anything but obvious. Until recently, the options market expected another 0.25% cut in the fed funds rate in December 2024 and four 0.25% cuts in 2025. But the last thing the Fed wants is for inflation to resurge and then have to raise the fed funds rate again. The economy is strong and inflation still hasn’t dropped to their target. It’s more than possible that the Fed will hold tight for a while. The options market is gradually moving to that opinion.
The fed funds rate is only a short-term rate. The bond market sets the yield on long-term bonds. The entire Treasury yield curve has shifted upward since the Fed’s last fed funds rate cut. The yield curve is pretty flat now. The 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity spread has shifted to positive after the yield curve was inverted for 2 years. This is significant because it has occurred before every recession since 1980.
Meanwhile, junk bond spreads are plunging. Like rising stock prices, rising junk bond prices indicate confidence in a growing economy where companies can pay their debts and not default.
The trade is strongly risk-on as stocks and junk bonds are rising faster than Treasuries. USD is rising while gold and silver are falling. The Fear & Greed Index is in Greed.
Stock indexes are up while VIX is down. The CAPE continues to rise to a new bubble high.
The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2024 was 2.5 percent on November 7. This good performance takes the pressure off the Fed to cut the fed funds rate.
The METAR for next week is sunny. The party on Wall Street probably will have legs for at least a short while.
Wendy