By Thomas O. Herrick
Market Strategist
The immediate reaction to the November 5 US elections by stocks and bonds is a continuation of what the market has been pricing in for some time. Stocks benefit immediately. Those election results, which include a possible Republican sweep of Congress, support continued low and perhaps lower corporate tax rates, which feed directly into earnings. Stocks also benefit from a regulatory and tax policy-induced growth tailwind on top of an already strong growth dynamic. Yields are higher, and bond prices are lower in reaction to results. The bond market is nervous about all the tariff chatter, which is a potential inflationary wild card. If inflation expectations become unanchored, the result is upside pressure on yields. The market is also concerned about potential wider deficits induced by the fiscal policy mix.
Consequently, yields are higher in the immediate aftermath of the election. Rapidly increasing yields are a potential problem for stocks, as well as bonds.
Markets were sensing a Republican victory.
Source: Natixis, Bloomberg
The wild card around tariffs is just that — a wild card. It’s not possible to discern what eventually becomes policy in this regard. The distance between campaign rhetoric and actual policy execution may be a marathon or a sprint. Tariffs — if widespread and steep — also have a potential negative impact on economic growth and earnings. Keep in mind that the Federal Reserve does not control rates beyond the overnight Fed funds rate. Anticipated Fed rate cuts will have a beneficial impact in some respects around credit that is tied to short-term rates. Longer-term yields, as we are seeing, respond to varied market inputs. One economic sector at risk is housing, as mortgage rates are tied to the 10-year Treasury yield. Mortgage rates have increased substantially in the last month or so, a detriment to housing affordability. Much will depend on the details, but much is priced in, given the election commentary. Yields have already experienced an eye-watering move since the beginning of October.
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