Back to normality?

(Originally posted on : Invezz )

US equities soared as voters went to the booths in the Presidential Election.

The rally accelerated after it was soon apparent that the result was clear and indisputable. Donald Trump had won.

The rally in equities led to strong gains across all the major US stock indices, taking the Dow, S&P 500, NASDAQ 100, and even the Russell 2000 to record closes.

The Dow topped 44,000 while the S&P 500 pushed above 6,000 for the first time ever.

Commentators were quick to credit the Trump victory for the boost, saying that his promises of tax cuts, deregulation, and even tariffs, would open up markets and boost corporate profitability.

And the gains were widespread. The banking sector was strong, as were sectors for energy, industrials, IT, and consumer discretionary.

In fact, all eleven sectors in the S&P 500 were positive by the end of election week. And it wasn’t just US equities that were in favour of investors.

The dollar soared in a move that hit the euro (which has plenty of its own issues currently) particularly hard, taking the EURUSD down to 12-month lows.

The Dollar Index rallied around 2.6%, adding to the gains made since the end of September when the greenback was really out of favour on high rate cut expectations.

This rally in the dollar was enough to pull the rug from underneath precious metals.

At the end of October, gold prices were knocking on the door at $2,800, currently the high point of a rally that began in December 2015.

Over the next two weeks, gold dropped back below $2,600 for a high-to-low decline of $200 or 7%.

Silver lost 12% over the same period. Both have begun to steady now, raising the prospect of another leg higher in this multi-year bull market.

In complete contrast, cryptos soared. Bitcoin surged to a fresh all-time high, coming within a whisker of taking out $90,000, for a gain of 34% over election week.

Trump, and his new bestie Elon Musk, are big crypto adherents, and it seems likely that they will push for a more favourable regulatory environment in their drive to make the US the base for all things crypto-related.

That being the case, it seems likely that Gary Gensler could soon be replaced as head of the Securities and Exchange Commission (SEC) where he has been anything but welcoming to the crypto sector.

In contrast, Federal Reserve Chair Jerome Powell said that he intends to see out his present term in office which terminates in 2026.

Contrary to certain reports, a US president doesn’t have the power to sack a Fed Chairman.

There was one potential fly in all this bullish butter – the sell-off in bonds and surge in bond yields. It was the latter that helped drive up the dollar, as longer-dated US Treasury yields flew higher following Trump’s victory.

Initially, the concern was that all of Trump’s unfunded tax cuts, tariffs, and deregulation would put a rocket under inflation, making it increasingly difficult for the Fed to cut rates much further. But there’s perhaps a more bullish interpretation.

While yields are up sharply, moves in TIPS (Treasury Inflation-Protected Securities) suggest that markets don’t believe that inflation is set to take off again.

This suggests that mid/longer-term bond yields are up as investors are becoming increasingly bullish on the US growth outlook.

If that is the case, then US equities could have a further rally.

But be warned: the air is getting very thin up here, and it may turn out to be too thin to support already sky-high valuations.

(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)

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