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Like many of you, I’m exhausted this morning. I stayed up way too late watching election returns, and falling asleep (sort of) with the TV on didn’t help. But with a profound market reaction to the new administration, I will do my best to clarify some of the positioning that has occurred today.
The second and third most active stocks on our platform over the past week were Trump Media & Technology Group (DJT) and Tesla (TSLA), companies interlinked by their respective owners’ political partnership. I have probably gotten more media inquiries about DJT as any company since GameStop (GME). They both have a meme-stock type of quality to them, with traders pouncing on every move up and down.
They came close to knocking off perpetual leader NVDA. The semiconductor giant was of course boosted by the announcement of its impending inclusion in the Dow Jones Industrials. I wrote a piece on Monday explaining why any relevance of its inclusion in an anachronistic market measure is purely psychological.
But the effects of the election upon markets is quite profound. In a podcast taped on Monday, I asserted that the stock market had not yet voted in the election and was unlikely to do so until the results became clearer. The early voting occurred during yesterday’s session, when we saw a broad market rally, though that might have simply been the usual momentum chasers taking advantage of relatively sparse liquidity. There is an old adage, “don’t short a dull tape,” and that might have been a cause of yesterday’s move – particularly in light of the fact that DJT stock actually fell during the session. But it looks rather prescient today.
Today’s winners are quite clear. Stocks in general are higher because investors are hopeful that income and/or capital gains taxes could be reduced. Small cap stocks are leading the charge with RTY up about 4.5%, well outpacing SPX’ 1.9%. Smaller companies could certainly benefit more from protectionist trade policies that insulate them from foreign competition, and a friendlier regime at the Federal Trade Commission could boost their takeover prospects. Health insurers are higher because they could potentially benefit from a diminution or repeal of the ACA. And of course, TSLA is sharply higher because of Elon Musk’s coziness with the President-elect.
The fly in the ointment is interest rates, however. Banks are benefitting from the steeper yield curve, along with hopes of easier regulation, but rate sensitive utilities and real estate stocks are not enjoying the 10-20bp rise in rates. And of course, this is occurring ahead of tomorrow’s FOMC meeting. Bond vigilantes seem to be fretting that a combination of lower tax rates and increased tariffs will poke holes in the budget that will need to be filled by higher Treasury issuance. Also, there are concerns that deporting millions of low-wage workers could raise wages – which is good for the blue-collar voters who opted to vote red – but create renewed inflationary pressures.
This is why tomorrow’s FOMC meeting is once again critical. It is difficult to expect them to deviate from the 25bp cut that the market expects, but their confidence in signaling future cuts might wane. Bear in mind that expectations for December 2025 Fed Funds had already risen from about 2.75% to over 3.5%. A lack of clarity from the Fed could push them higher still. Bearing in mind that higher rates reduce the present value of future cash flows, increase costs to corporate and individual borrowers alike, and provide competition for equities, the future path for stocks is heavily dependent upon the outlook for bonds.