Remember interest rates? That little economic mechanism that people were worried about before Donald Trump won the presidency and stocks roared ever upward?
Mind the gap — between bond prices and yields. They may be telling you something. As all are aware, yields climbed in the wake of the stunning election upset. And with higher yields, the implication is that inflation is in the cards, which might beget higher interest rates. If these come sooner rather than later, there are winners and losers, as with any scenario. Banks may see some higher numbers at the bottom line. At the same time, consumers may be a little bit warier of opening up the purse strings.
Here’s why Trump’s ascension signals interest rate spikes. He’s promised time and again to boost infrastructure spending while concurrently cutting taxes. Both houses of Congress are solidly in the Republican camp, so do not expect gridlock on either front. If taxes go down and spending goes up, deficits also go up, and prices may go up, signaling inflation. Then the Fed may step in raise rates, an event that is virtually guaranteed to happen sometime. Could it be that “sometime” happens as soon into a Trump term as there are enough vacancies (now two) on the Fed’s bench of governors? Oh, and should Janet Yellen step — or be cast — aside, there’ s another new voice that will take its place in the chorus at the Fed. What does all this portend for stocks? Rising rates may dampen upward stock movements as investors chase yields (driving bond prices back up) and worry about heated equity valuations. It might not be long before bonds trump the Trump stock rally.