The U.S. election has sent shock waves around the world just as in 2016 when Donald Trump pulled off an upset victory. The surprise this time was not that Donald Trump won, but rather that he built a multi-racial coalition of working-class voters and was able to garner the popular vote.
When Trump won the 2016 election, the stock market went on a tear as investors responded favorably to the prospect of tax cuts and widespread deregulation that were intended to boost economic growth. The initial reaction this time has been similar with the stock market posting its biggest weekly gain in two years.
It remains to be seen how long the honeymoon will last. John Authers of Bloomberg points out the only time the stock market was as expensive during a presidential election was in 1928. The final outcome will ultimately depend on how the economy performs in the next few years.
On the positive side, the economy is more robust than eight years ago, when it was in the midst of a sub-par recovery from the 2008 financial crisis. Since then, it has far outpaced other developed economies, and inflation is approaching the Fed’s 2 percent target after it surged during the COVID-19 pandemic. This has enabled the Fed to lower the fed funds rate by 75 basis points in the last two FOMC meetings.
One omen, however, is that Treasury yields have increased by about 80 basis points since the September meeting. This is partly because investors are concerned about the prospect of outsized budget deficits. Federal........