Is the Trump Trade Rally Facing Headwinds?

As investors ride the wave of optimism surrounding the Trump trade rally, some underlying concerns are beginning to surface. The S&P 500 is currently enjoying a six-day winning streak, buoyed by expectations that the president-elect will implement sweeping tax cuts, reduce regulatory burdens, and stimulate economic growth. A significant factor contributing to this surge is the anticipation of increased deal-making activity, which has notably revitalized bank stocks.

However, cautionary signals are emerging, even from within the financial sector. Several economists on Wall Street are raising alarms about the potential consequences of Donald Trump’s proposed policies, particularly his plans for tariffs and tax reductions. These initiatives could inadvertently trigger inflationary pressures and exacerbate the national deficit. While some of Trump’s supporters argue that the current market rally challenges the conventional wisdom of economic experts, it is important to remain vigilant. The president-elect may soon discover that a tightening economic environment and a restless bond market could necessitate a reassessment of his ambitious agenda.

Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, articulated these concerns in a recent client note, stating, “This is not 2016, when Trump inherited an economy recovering from six years of secular stagnation.” She pointed out that bond investors are increasingly anxious about the prospects of rising inflation and escalating debt-financing costs, particularly in light of the staggering $35 trillion national debt. Such factors could pose significant constraints on the incoming administration’s ability to navigate fiscal policy effectively.

In contrast, proponents of the rally maintain an optimistic outlook. Notable developments in the market include:

• Bitcoin has surged to nearly $90,000 as of Tuesday, having doubled in value since the beginning of the year. MicroStrategy has made headlines by acquiring over $2 billion worth of the cryptocurrency, further enhancing its already substantial holdings and driving its stock to unprecedented heights.
• Tesla has experienced a remarkable increase of more than 40 percent in just the past week, adding over $300 billion to its market capitalization, with further gains evident in premarket trading.
• The KBW Nasdaq Bank Index, which tracks shares of some of the largest banking institutions in the country, is enjoying one of its most impressive runs in years, with analysts predicting continued upward momentum. This robust stock market performance is also expected to result in substantial bonuses for Wall Street professionals this year.

Meanwhile, the dollar and Treasury yields paint a contrasting picture. The U.S. dollar has been on an upward trajectory since Trump’s election victory, which could present challenges for the profitability of multinational corporations. Furthermore, the yield on the closely monitored 10-year Treasury bill rose again on Tuesday, indicating that investors are increasingly wary of potential inflation and the Federal Reserve’s response.