ALL year, a slew of Wall Street pros have questioned the durability of an indiscriminate risk rally that has fattened stock prices by trillions of dollars, sent Bitcoin soaring, fueled a credit bonanza, and more.
All year, besides a short-lived market wobble in the summer, they have been dead wrong. Now with Donald Trump storming back to the presidency and assets surging in his wake, an altogether different anxiety has set in: That investors aren’t bullish enough.
This insecurity is fueling the latest buying spree across stocks, credit and crypto. More than US$2 trillion was added to equities over the five sessions, helped by a US$20 billion inflow to funds on Wednesday alone. Small-cap companies surged nearly 9 per cent, banks rallied too and Bitcoin hit a fresh record.
Behind the run-up is near-unalloyed optimism that Trump’s pro-growth promises – tax cuts and deregulation – will unlock another round of gains in an already flourishing economy, just as the Federal Reserve tilts toward an easy-money stance.
Bonds have been the sole port of scepticism in this election cycle on concern that the price-tag for fiscal stimulus will be high. Yet even Treasury yields showed signs of settling down by week’s end.
Wall Street is now falling over itself to predict how far the everything-boom goes. As Bitcoin crossed US$75,000 for the first time, VanEck’s Matthew Sigel is calling the bull case “stronger than ever,” with US$180,000 possible next year and a cool US$3 million by 2050. Veteran analyst Mike Mayo said he sees a “paradigm shift” for US banks, one of a slew of bullish calls on financials.
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The venerable strategist Ed Yardeni’s big worry is that his own optimism has been too restrained, predicting a full-on “Roaring 2020s” ahead.
“I keep getting stampeded by the stock market,” said Yardeni, founder of Yardeni Research, one of the industry’s staunchest bulls. “I think we’re in a bull market that’ll last through the end of the end of the decade.”
Exuberance has flooded all corners of Wall Street. The S&P 500 hit its 50th record this year amid a weekly gain of 4.7 per cent. The VIX Index, a measure of volatility known as the “fear gauge,” saw its biggest weekly drop since 2021.
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While momentum can beget momentum, moves as fast as this also risk blinding investors to lingering weaknesses in the economy and elsewhere. It was only in September that concern about the health of the US labour market sent the S&P 500 down more than 4 per cent in a week. The month before, economic fears and the unwinding of hedge-fund trades nearly spurred a 10 per cent correction in the index, sending the VIX to its biggest spike in three decades.
“We may be getting ahead of our skis longer-term,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “Very short-term yes, it is definitely a risk-on event. That said, I think I just think the tails get ‘fatter’ in a Trump presidency,” referring to the likelihood of risky outcomes given the billionaire businessman’s combative policy posture.
Holding up the president-elect as possessed of a unique market touch is also somewhat belied by history. Despite his tweeting more than 100 times during his first term on market topics, the S&P 500’s return in Trump’s first term was actually a bit smaller than the gain under Democrat Joe Biden, whose growth policies the new president ridicules.
Risky business
Valuations after a two-year advance are now among the biggest issues. While Trump cited rising share prices as a scorecard on his first presidency, the bar is higher now. Earnings multiples sat at the highest level on record for an election day, potentially making it harder for tax cuts to spur equities anew. Higher borrowing costs as a result of ballooning budget deficits could further suppress the positive impacts from his pro-corporate policies.
Another risk is that the Fed backs away from the pace of rate cuts the market now envisions. The likes of Barclays Plc and Toronto-Dominion Bank have been dialing back expectations about 2025 interest-rate reductions as restrictions on immigration and higher tariffs under the Trump administration could spur inflation.
Still, the Fed’s latest meeting did nothing to tamp back the positive sentiment in risk markets. Chair Jerome Powell said the economy is strong and refrained from signalling whether the central bank will skip cutting rates, following Thursday’s reduction of a quarter percentage point.
Despite signs of slower job growth, economic data has remained resilient with Citigroup’s US Economic Surprise Index in positive territory.
“You can still squeeze a bear narrative if you look at manufacturing PMIs, the yield curve and then the change in unemployment, but the bull narrative is just so much stronger,” Sebastien Page, chief investment officer at T Rowe Price, told Bloomberg Television.
“The unemployment is still low, the Fed is easing, we have a fiscal pedal to the metal, we have a lot of good things.”
A proxy of so-called risk-on metrics compiled by Bloomberg that spans exchange-traded funds tracking small-caps, high yield bonds and financial equities saw its biggest weekly inflow since 2016 – incidentally the year Trump scored his first presidential victory. Retail traders’ participation in the options market surged to record levels in the days before the election, according to JPMorgan Chase & Co.
Amid Bitcoin’s surge, the largest ETF holding the coin claimed its biggest one-day haul since inception. Even Dogecoin, a cryptocurrency created as a joke in 2013 that considers Elon Musk among its most ardent and vocal supporters, hit a new high.
Small caps, which have struggled to rebound all year, finally broke out. The group is expected to be among the biggest beneficiaries of a Trump White House, considering his protectionist rhetoric and plans to cut corporate taxes. The prospect of a favourable regulatory framework for financials and energy also sent investors rushing to the sectors.
Investors embraced risk in credit, too. With high-yield spreads hovering around the tightest since 2007, they sent the most cash this year to the biggest junk-bond ETF.
“There’s a lot of optimism in the market,” said Erin Browne, portfolio manager and head of asset allocation at PIMCO, which has started buying more domestic companies and selling some of their more internationally exposed names. “There’s a lot of optimism that there’s going to be more regulatory easing next year so that corporate tax rates aren’t going up. And we’re in an environment with still strong corporate earnings growth and the Fed cutting.” BLOOMBERG
