In today’s Money Morning…markets not behaving as expected…piling on debt to keep election promises…finding the stocks that will gain from massive government stimulus…and more…
Here’s how it was supposed to play out.
If Hillary Rodham Clinton won, stocks were supposed to rise, and gold would fall.
If Donald John Trump won, stocks were supposed to fall, and gold would go up.
So what happened? Well, US stock futures plummeted as Trump took the lead in the vote. Stocks around the world slumped. But when the US market opened, stocks soared…and gold fell.
What the heck’s going on? Here’s our take…
Prior to the result, investors and markets thought a Trump presidency would involve dismantling the economy, and the imposition of trade barriers.
That’s only half true.
Trump won’t dismantle the economy. But there will be trade barriers.
However, Trump’s plans go further than that. A Trump administration will result in perhaps the biggest government stimulus the American economy has seen since the 2008 meltdown and 2009 recovery.
That’s why stocks are going up.
Making the debt ‘great again’
Until now, the market hasn’t done much, as investors waited for the US Federal Reserve to raise interest rates.
Investors didn’t know how the market or economy would react to a rate rise.
The assumption was that the US economy was strong enough, just. But that any growth would be slow, and the Fed would only raise rates gradually.
That’s all changed.
Remember, Trump wants to, ‘Make America great again.’
Apparently, part of that involves the government spending hundreds of billions of dollars on big infrastructure projects.
That’s hundreds of billions of dollars the government doesn’t have, by the way.
But it doesn’t matter, the market loves the idea. It’s what the market has wanted the whole time — more spending.
Ironically, despite the frosty relations between Trump and US Federal Reserve chairwoman, Janet Yellen, a Trump presidency could be just the good news she’s been waiting for.
Frosty relationship set to boost the market
Over the past two days, US interest rates have soared. Check out the chart below of US 10-year government bond yields:
Click to enlarge
Before the election, the bond yield was below 1.8%. Today, it’s 2.15%. That’s a big move in the bond market.
It’s a similar story with shorter term bonds. The two-year bond is now at 0.915%, up from below 0.8% at the start of the week.
This helps the Fed. It means that rather than the Fed leading rates higher, the market will lead the Fed higher. Just what it wants to help it out of the sticky low interest rate situation.
There is a downside.
Although interest rates may be on the up, it’s at the expense of more debt. US government debt is already over US$19 trillion. And any talk of keeping debt and spending down will be lost now that Republicans control both the legislative and executive branches of government.
It’s hard to imagine either branch voting against or vetoing a big stimulatory spending plan.
That’s why, in the short term, we believe it makes sense to buy into stocks and sectors that could benefit from the coming spending spree. Among them, we like resources stocks. Specifically, the kind of back-from-the-dead resources stocks that my colleague, Jason Stevenson, looks for in Resource Speculator.
But be clear about all this. It’s not sustainable. Borrowing and spending for growth never is — especially when you don’t have the means to repay the borrowing.
The US government is US$19 trillion in debt. Under a Trump presidency, that debt will only grow. Perhaps faster than ever.
The market is building up to one huge stimulus-induced boom. So buy certain stocks while you can. It won’t last.