Many were scared of the reaction to a Donald Trump presidency, even the Federal Reserve Open Market Committee. After their November 2 meeting, the Fed telegraphed uncertainty by holding off on raising rates. The markets interpreted that as fear – fear of a backlash and/or financial calamity post election. (They took a similar stance before the Brexit vote, and while there was a decent amount of volatility then, the Fed returned to their mission of monitoring the economy and inflation.)
With so much rhetoric being tossed around, a nervous Fed that was wary about policy shifts was understandable. Furthermore, they did not want to be seen as influencing an election. They took a pass on raising rates this month knowing full well that waiting a month to tighten monetary policy (if they so choose) would not be disruptive.
Who could blame the Fed for waiting? But now it looks like they may have an “out” from accommodative monetary policy from none other than Donald Trump!
Markets reacted instantly to the election results. Equity futures plunged sharply on November 9 but then bounced back through the morning and into the next trading day as traders realized that the end of the world was not drawing nigh. Volatility fell sharply as uncertainty about who would win the election was removed. (Jim Cramer and I talked about this likelihood in last week’s off the charts segment.)
Certain sectors rallied harder than we’ve seen in years, like the banks, financials, materials, infrastructure and home repair. Small caps were on fire, with the Russell 2K rising an astounding 10% on the week. The most notable move was in bonds and gold. Both were trashed this past week, while the dollar enjoyed a solid move up.
Why would bonds sell off and equity markets rally? Perhaps the markets are sniffing out some potential economic growth brought on by new economic policies (rather than monetary policy), which will result in increased productivity. This is an ideal situation for the Fed to gradually remove their accommodative policy. Potentially a win/win for everyone. Imagine that!
Optimism abounds with the new administration taking shape, but remember – the market tells the truth. If you believe this bullish move is real (the selling was intense in bonds, while stocks really picked up that high turnover) then perhaps we are looking at blue skies ahead.
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