While the bond market is performing very similar to the infamous Taper Tantrum of 2013, this is a very different market today. Recall that Taper Tantrum was about removing accommodation. The rally in the stock market and the selloff in the bond market now is generally centralized around a common theme. This is a post-election and pre-inauguration frenzy. The market is trading on hope, hope that the new administration drives growth and inflation along with it.
It might seem odd that given the presidential election was so controversial, that here we stand today in the midst of a major stock market rally. Little predicted a Trump win and most predicted that if he did win, the stock market would falter and the bond market would roar to lower yields. Why did so many get it wrong? Let’s ignore that question as it’s too argumentative and focus on the more important question, which is why is the stock market moving higher and the bond market getting pummeled? As of this morning the 10yr trades at 2.39%, its highest point since July of 2015 and up 100bps since July of this year.
Let’s look at the facts of the upcoming administration. It will be dominated by the pro-business Republican party. Aside from that and pushing politics aside, the general public doesn’t know specifically which policies the Republicans plan to push for. The fact remains that the market is trading on belief and not much fact. Don’t forget that all of the market movement has happened immediately since Election Day, from the very moment the results came in. The only thing that has remained constant since Election Day is what I said at the top of this paragraph, the government policies are in full Republican control. There is still much to be debated and decided: which policies, what is the priority, do you focus on economic or social, which policies do you pass that don’t create broad discontent among all voters, what about the Republican representatives that have to avoid any controversial policies (are they an asset or liability), how do the Republicans remain united? Does the party ignore Democratic voters and/or do they start a war with Bernie Sanders and Elizabeth Warren? These are all things that have yet to be determined. My fear is that this stock market rally is purely an adrenaline rush from an unprecedented and controversial (and nasty) election. It was a certainty prior to Election Day that whoever won was going to have to deal with a divided country. How is it that suddenly everything is so rosy?
But as the saying goes “The Trend is Your Friend” and the markets direction must be respected.
What about the FOMC? Their opinions have not changed and they will continue to remove accommodation as they see fit. They do not see anything yet that has changed their view of the economy or inflation expectations. “Don’t Fight The Fed” was another one of my more favorite quotes. The market has priced in a 100% chance of a Fed raise on December 14th and some have priced in more than a 25bps move next month. I believe that is excessive. I do believe that the Fed will raise 25bps next month and they should raise 25bps. The market is telling them to, the GDP figure this week tells them to and inflation is close to 2%. Past December, all bets are off. It’s just too early for this much certainty.