The uncertainty of who will be the new president has now vanished from the market’s collective wall of worry, disappearing in what only can only be called “butt-kicking” fashion. President-elect Trump won 312 electoral votes to Vice President Harris’s 226. On the popular vote front (as of this writing), it was Trump with 74,800,000 votes to Harris’s 71,200,000. Yes, a “butt-kicking” by both measures.
Oh, then the Fed reduced the Federal Funds target range by 0.25%. When asked if he would submit his resignation to Trump if requested, Chair Powell replied, “No.” When pushed further, he replied, “Not permitted under the law.”
The Associated Press recently published an article outlining the 12 major Trump policies. We will use this as a framework for a discussion of our views of their impact on the economy and interest rates.
In summary, we believe:
We will not violate the first rule of forecasting: forecast direction or forecast timing, but never in the same forecast.
It has been a volatile week in all markets. The following table reflects the daily changes in the markets from Wednesday through Friday:
We have seen the initial impact of the election on longer-term markets, but what about the short-term markets? What are the short-term market expectations for future Fed rate cuts? The following table reflects the markets’ implied probability of future Fed action on the day before the election (November 4) and at the end of the week (November 8).
The fixed-income markets anticipate smaller cuts in the Fed Funds rate target range with less confidence.
CHANGES IN RATES
What appears to be a relatively quiet week-over-week change in the Treasury market covers a lot of volatility. As highlighted above, all markets had considerable moves.
The municipal rates moved in the same pattern as Treasury yield and with the same volatility.
Municipals, as measured as a ratio versus their Treasury equivalent maturities, moved lower on the week.
Corporate yields were lower week over week.
One of the largest drivers of near-term inflationary pressures is future tariffs. It seems the president does not need congressional approval to impose tariffs.
“‘For more than 80 years, Congress has delegated extensive tariff-setting authority to the president,’ the Congressional Research Service, a nonpartisan group made up of congressional staff, wrote in a February report.” Tariff Approval
We decided to contrast and compare the president-elect’s tariff views with one of the more infamous tariff policies in history, the Smoot-Hawley Tariff Act. Since Chris did most of his research in high school and college with books and encyclopedias, we will use Britannica.com as one of the research sources.
Smoot-Hawley Tariff:
“U.S. legislation (June 17, 1930) that raised import duties to protect American businesses and farmers, adding considerable strain to the international economic climate of the Great Depression. The act takes its name from its chief sponsors, Senator Reed Smoot of Utah, chairman of the Senate Finance Committee, and Representative Willis Hawley of Oregon, chairman of the House Ways and Means Committee. It was the last legislation under which the U.S. Congress set actual tariff rates.”
Impacts of Smoot-Hawley:
“Smoot-Hawley contributed to the early loss of confidence on Wall Street and signaled U.S. isolationism. By raising the average tariff by some 20 percent, it also prompted retaliation from foreign governments, and many overseas banks began to fail. (Because the legislation set both specific and ad valorem tariff rates [i.e., rates based on the value of the product], determining the precise percentage increase in tariff levels is difficult and a subject of debate among economists.) Within two years some two dozen countries adopted similar “beggar-thy-neighbour” duties, making worse an already beleaguered world economy and reducing global trade. U.S. imports from and exports to Europe fell by some two-thirds between 1929 and 1932, while overall global trade declined by similar levels in the four years that the legislation was in effect.”
What do the Trump tariff policies mean for the American consumer and economy?
“It’s bad for consumers,” said Mark Zandi, chief economist at Moody’s. “It’s a tax on consumers in the form of higher prices for imported goods.” “It’s inflationary,” he added. He and other economists predict the proposed tariffs would also lead to job loss and slower economic growth, on a net basis.
Mark Twain warned us that history does not repeat, but it does rhyme. Time will tell what the ultimate impact on the economy will be.
The 5-year Breakeven Inflation Rate finished the week of November 18 at 2.27%, 2 basis points lower than the close of November 1. The 10-year Breakeven Inflation Rate finished the week at 2.35%, 2 basis points lower than the previous week’s close.
As of November 8, 10-year quality spreads (AAA vs. BBB) were 0.95%, 3 basis points tighter than the November 1 reading (based on our calculations). The long-term average is 1.70%.
Quality spreads in the taxable market are not attractive. They ended the week at 0.68%, 11 basis points lower than the week prior. High-yield quality spreads were 16 basis points lower at 2.50%.
Money Market Flows (millions of dollars)
Overall, money market funds saw increased inflows compared to the week prior.
Mutual Fund Flows (millions of dollars)
Cash flows into bond funds were mixed on the week. Significant among these were outflow in municipal.
ETF Fund Flows (millions of dollars)
ETF asset classes experienced increased positive flows.
The supply of new issues is expected to be about $5 billion this week. Supply has slowed down, which should support relative municipal bond returns.
With the election behind us, we can look forward to the possible outcomes of the new administration’s policies. We believe they will be supportive of the equity markets, at least in the near term. Deficits and government debt should increase as it finances all these growth incentives. If the growth incentives work out, we believe the Fed will be more reticent to decrease short-term rates because inflation should also increase. This should lead to a “bear steepener” event in which all rates increase (or at least stop declining), and long-term rates will be higher than short-term rates. This will steepen the yield curve.
Our neutral duration, overweighting the short end of the relative strategy’s investment universe within an actively managed adder structure, should prove effective in this environment. That said, it is a good time to remind our readers that our crystal ball gets fuzzy when forecasting long-term events. Much like the Fed, we will react to new data as it arrives.
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The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
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