If President-elect Trump follows through with spending plans and tax reductions (as promised, I think), that will push deficits higher and bond yields up (prices down) as the US Treasury will have to issue plenty of debt to pay for it (creating supply that will make bond investors demand higher yields). It also means that, at long last, inflation may return also forcing investors to ask for more inflation protection in yield (especially in longer dated maturities). Higher bond yields will also put upward pressure on mortgage rates.
Is this, in the end going to be favourable for corporate earnings? Certainly the stock markets, while initially very worried, decided in the end, that this might be favourable. Certainly banks will benefit from a steeper yield curve, anything related to infrastructure will possibly benefit, health care-related activity will be under reduced pressure from the authorities (de-regulation vs, greater regulation under democrats).
Will this bring out the consumer? In the end that is the key because the consumer represents 2/3 of the US economy and the consumer, has been less than comfortable with the outlook thus far. Potentially, more jobs may give the consumer more confidence (will they be good, high-paying jobs? or low-paying jobs?). More confidence may mean more spending.
Will trade protection rhetoric be enforced?
This is where the greater uncertainty lies: protectionist practises reduce productivity and stoke inflation which will call for higher interest rates.
Do higher interest rates counter all the potential growth that increased government spending adds?
Debt burdens are huge on a global scale and it appears that they are going to get bigger, so there will be a negative impact, just how much will be the discussion amongst the central bankers and economists around the world.
There will still be lots of uncertainty, so volatility will likely not go away.
A US recession? It seems less likely, but it can't be ruled out completely (if more workers enter the labour force, unemployment numbers could rise, if they are not finding work). Higher interest rates now could choke off growth, before all the promised spending is eventually put into place.
Inflation will return.
Bond markets, having resumed their leadership role are telling us that now.
Stocks will remain expensive until earnings are able to catch up (and that may or may not happen, depending again on what happens to consumer and business confidence).
The low return environment: rising inflation, improving growth, higher yields (will start to raise the risk-free rate of return) could start to improve.
In the end, adding a little risk to a portfolio now may make some sense, but caution should be maintained in order to properly assess progress along the way.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist