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Trump Vs. Fed

Douglas Adams profile picture
Douglas Adams


  • Markets adjusted quickly to the Trump victory, posting impressive end-of-year gains in sectors of the economy most likely to benefit from fiscal stimulus derived from enhanced government spending.
  • With the labor market close to full employment, interest rates on the rise and inflation creeping into the greater economy, the Federal Reserve is pulling back on monetary stimulus.
  • The Trump administration and the Fed could be on a collision course in the medium term. In the interim, the Fed has the luxury to wait and see.

Markets adjusted quickly to the surprise victory of Donald J. Trump in November's presidential election, with the S&P 500 gaining almost 5% from the election through the end of the year. The risk premium, or the amount of compensation demanded by investors to assume perceived market risk, broke positive with the Trump victory as the yield on the 10-year Treasury note soared from 1.828% on the eve of the election to a year-high of 2.603% by the 15th of December before falling back to a yield of 2.445% to end the year. The bond market in pure binary fashion saw the incoming Trump administration as clearly inflationary with talk of fiscal spending on infrastructure, tax cuts for both households and businesses and pushing back regulation of the finance and health sectors of the economy.

Of course, market enthusiasm for the so-called Trump trade could easily derail as his erratic executive order banning US entry from seven Muslim majority nations and his open and very undiplomatic feuds with Mexico, Australia and now Iran appear to be aptly demonstrating. Such gyrations from standard diplomatic procedures and "gut" approaches to problem-solving are fairly standard features of the decision-making processes in many developing countries. The implied uncertainty carves out discounts on equity valuations and attaches added risk premia to fixed instruments in an effort to price in volatility - political, economic or otherwise. The suggestion here is that some implied sort of uncertainty measure could become a component of stock valuations and fixed instruments here in the US, particularly to sectors to which investors have flocked in hopes the administration will deliver on the holy trinity of tax cuts, deregulation and defense spending - with perhaps some infrastructural spending tossed into the mix. Such implied uncertainty measures would make dollar-based assets less attractive as both a store of value and a safe harbor vehicle from uncertainty - reflective of the sharp

This article was written by

Douglas Adams profile picture
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.

Analyst’s Disclosure: I am/we are long KBWR, ITA, IYM, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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