Trump win sends markets into parallel realities

MAGA thinking. Welcome to the pick ’n’ mix market. Donald Trump’s surprisingly clear victory in the U.S. presidential election has sent investors rushing into parallel, but clashing, realities.

Domestic stocks, crypto assets and the dollar all leapt on Wednesday, lured by the prospect of the Republican candidate’s promises of tax cuts, deregulation and continued strong growth. Bond investors, meanwhile, focused on the fears of a fiscal meltdown caused by some of the same policies. Overseas stock markets and currencies took cover but didn’t panic. The short-term moves make sense in the aftermath of the vote. But in the long run, these convenient truths will give way to a more nuanced, and scary, reality.

Both the S&P 500 Index and the Dow Jones Industrial Average rose to record highs at the open while the Russell 2000, which comprises smaller companies, was close to a near-three-year high. Trump’s second term holds the promise of tax breaks, deregulation that makes deals easier and business-friendly courts. Shares in financial groups Capital One and Discover gained on hopes that the new administration may look more favourably on their planned merger. So did supermarket operators Kroger and Albertsons. Bitcoin, the risky asset par excellence, touched an all-time peak of close to $75,000.

Yet while investors were willing to price in some of Trump’s mooted policies, they paid less attention to others, such as his threat to impose 20% tariffs on all imports, with levies of 60% on Chinese products. Shares in artificial intelligence darling Nvidia rose, even though the new President’s pledge would increase the price of imported chips made by Taiwan’s TSMC.

While equities and crypto were exhibiting animal spirits, bonds were displaying a more human trait: anxiety. Yields on 30-year U.S. government bonds rose from 4.42% to more than 4.6%. In mid-September, they were below 4%. Fixed-income investors fear that tariffs, tax cuts and spending will fuel inflation and make the country’s bad fiscal situation even worse: the budget deficit is already a hefty 7% of GDP while federal government debt is 99% of GDP. A fiscal splurge will force the Federal Reserve to keep interest rates elevated. It could even cause a full-blown debt crisis.

For a while, the two trends – buoyant risky assets, depressed bonds – can coexist, not least because investors in equities have much shorter time horizons than the fixed-income types. If Trump keeps his word and unleashes a protectionist wave coupled with loose fiscal policy and corporate deregulation, it will be hard to avoid a debt reckoning or at the very least a prolonged period of above-average inflation. Eventually the conflicting market realities will clash.

Context News

Wall Street’s main equity indexes soared to new highs on Nov. 6 after Republican candidate Donald Trump won the U.S. presidential election. The benchmark S&P 500 Index of large U.S. companies was more than 2% higher at 1530 GMT. The Russell 2000 Index, which includes smaller companies, jumped nearly 5%. However, U.S. government bonds sold off sharply amid fears that Trump’s promise of draconian trade tariffs and fiscal splurges will lead to ever larger deficit and debt burdens. Yields on the benchmark 10-year U.S. government bonds touched 4.453% at 1038 GMT, the highest level since July.