U.S. equities mostly climbed again on Friday as enthusiasm over the surprise election of Republican Donald Trump to be the next President of the United States continued.
The initial terror of the win by the proudly anti-establishment candidate quickly gave way to aggressive buying as traders realized his aggressive tax cut, infrastructure spending and militia-buildup plans amount to a huge, if unfunded, fiscal stimulus.
And while the advance has been narrowly participated in (with tech stocks notably lagging) and marred by volatility in other assets (bonds, currencies and emerging market assets), large caps tagged yet another new record high to get the best week since 2011.
In the end, the Dow Jones Industrial Average gained 0.2%, the S&P 500 Index gave back 0.1%, the Nasdaq Composite gained 0.5% and the Russell 2000 finished 2.5% higher. The dollar was mostly higher, gold extended its recent selloff falling another 3.5% and oil was under pressure losing 2.8%.
Treasury bond trading was closed for the holiday, but bond ETFs continued their recent weakness with the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) down 0.6% to cap a 7.4% decline for the week.
That boosted the ProShares UltraShort Treasury Bond (NYSEARCA:TBT) recommended to Edge subscribers 1.3% for a total gain of 25.4% since recommended in August.
Consumer discretionary stocks led the way with a 0.6% gain on nice moves in the retailers with the SPDR S&P Retail (ETF) (NYSEARCA:XRT) up 1.6%.
Processor-maker Nvidia Corporation (NASDAQ:NVDA) surged 29.7% thanks to a huge third-quarter earnings and revenue beat driven by solid demand for its GPUs with applications not only in computer gaming, but with exposure to emerging technologies in VR, autonomous driving and AI/deep learning. And Walt Disney Co (NYSE:DIS) shrugged off overnight weakness to rise 2.9% after reporting a top- and bottom-line quarterly miss on a 13% drop in ESPN revenue as investors were emboldened by management talk of over-the-top offerings.
Energy stocks were the laggards, down 1.7%.
On the economic front, the University of Michigan’s consumer sentiment reading for November hit 91.6, beating the 87.5 expected and the 87.2 reported in October. The rise was driven by an improved outlook for the economy and was collected prior to the election outcome. Notably, inflation expectations rose to 2.7% from 2.4% in the prior month.
Watch for rising inflation to be a growing theme of discussion on Wall Street in the weeks to come as Trump’s election has spooked the bond market into drastically repricing their outlook for prices. We are in the late stages of the business cycle, with corporate profits sliding, the unemployment rate below 5%, and evidence wage gains are building.
Thus, Trump’s plans to boost the economy risk lifting inflation more than growth according to Capital Economics. Especially if mixed with a more aggressive renegotiation of trade policies enforced by tariffs and an encouragement of the return of manufacturing production to the United States. Trade barriers, in all forms, essentially raises the costs of imports — which directly influences the inflation rate.
For a sense of scale, the Committee for a Responsible Federal Budget estimates Trump’s policies could double the national debt at a cost of $12 trillion over the next 10 years. To merely stabilize the national debt, U.S. GDP growth would need to accelerate to 5.4% vs. the 2.1% growth currently projected.
To balance the budget, growth would need to hit a whopping 10.3%.
Wall Street is ignoring the fiscal risks of all this for now, but with the debt ceiling set to hit its limit in March, watch for concern to bubble up after the New Year. Over the near term, the rise in interest rates is likely to get a boost from a likely Federal Reserve interest rate hike in December — with an accompanying drag on housing, auto sales and consumer spending.
There is also the nagging problem of the narrowness of the stock market’s rally this week, with just four Dow stocks — Goldman Sachs Group Inc (NYSE:GS), Caterpillar Inc. (NYSE:CAT), JPMorgan Chase & Co. (NYSE:JPM), and Home Depot Inc (NYSE:HD) — responsible for half the index’s gain.
Moreover, the performance divergence between the Dow and the tech-heavy Nasdaq (with Big Tech stocks weak on fears of a clampdown on skilled H-1B visas used heavily by Silicon Valley) was the largest since the financial crisis.
There is also the risk that chaotic weakness in emerging market currencies, with China devaluing its currency again overnight, could spark a global selloff as it has multiple times over the past two years.