The challenge, however, is 2024, not 2016. It has changed a lot since then.
“As Mark Twain once said, ‘History doesn’t repeat itself, but it often rhymes,'” Matt Maley, chief market strategist at Miller Tabak + Co., LLC, said. “So investors should remember the old playbook, but not necessarily memorize it.”
As Trump ran for president in early 2016, US equities faltered, posting their worst start to a year since the financial crisis with a more than 5% decline in January. At the time of its inauguration, the S&P 500 was up 9.5% in 2016 after ending 2015 in the red. The index is trading at 17 times projected earnings. The yield on 10-year Treasuries is around 2.5%, and the fed funds rate is around 0.75%.
Fast forward eight years and the landscape is very different. equity valuation increases. The S&P 500 topped and briefly surpassed 6,000 for the first time after rising 56% over the past two years. The tech-heavy Nasdaq 100 index is also at a record high after nearly doubling since the start of 2023. The S&P trades at 23 times projected earnings, some 40% above its average since 2000. The yield on 10-year Treasuries is 4.3%, and the food fund rate is at 4.75%.
In other words, the stock market was good enough to tear up at the start of Trump’s first term in office. But this time, the stock appears to be at or near its peak, and may not be anywhere else.
“It’s not what you normally think — rates go up, and the stock market goes up a lot with rising rates — unless inflation goes up,” said David Miller, co-founder and chief investment officer at Catalyst Funds. . “What, I think, is what happened.”
Inflation Policy
The premise behind traders’ reaction to Trump’s win is that his promises of tax cuts and deregulation will continue to lift equities to new heights. The flip side, however, is that the president-elect’s protectionist trade stance and plans for mass deportation of undocumented workers are seen as inflationary and could threaten growth.
“A Trump victory is likely to increase inflationary pressures due to tariffs and immigration policies,” TD Securities strategists including Oscar Munoz and Gennadiy Goldberg wrote in a note to clients on Friday.
That explains why Wall Street forecasters are dialing back expectations of how much the Federal Reserve will cut interest rates after the US central bank cut borrowing costs by a quarter of a percentage point on Thursday.
TD Securities predicts the Fed will pause interest rate cuts in the first half of 2025 to assess the impact of Trump’s economic plan. Goldman Sachs Group Inc. had predicted rate cuts in May and June, but now projects in June and September, signaling a slower pace. And Barclays Plc economists expected the central bank to cut rates three times by 2025, but cut it in half.
“The bond market will determine whether these policies work,” said Carol Schleif, chief investment officer of BMO’s Family Office.
In the stock market, the difference between 2016 and 2024 was already visible before the election. U.S. equities outperformed their international counterparts in October, which is rare in an election year, according to Bloomberg Intelligence equity strategist Gina Martin Adams.
And now that the voting is over, the tilt toward Value is not as strong as it was in 2016, when the Russell 1000 Growth Index was roughly flat in the three sessions after Election Day while the Russell 1000 Value Index jumped. This time, on the contrary, with the growth index easily exceeding the value index.
Growth Unites the Party
At the sector level, not a single group has seen a decline since the election. In 2016, five out of 11 sectors fell between Wednesday, November 9 and the weekend.
The energy group rose 3.6%, boosting profits that made the sector the best-performing sector during President Joe Biden’s term, gaining nearly 120% since his inauguration. It was basically flat in the days after the 2016 election, and the sector actually declined 40% in Trump’s first term.
Despite the fact that the US has become the world’s largest oil producer under Biden, Miller Tabak’s Maley said that most investors do not realize that energy stocks performed better under him than in Trump’s first term. But he expects the sector to outperform this time around.
While the differences between 2016 and 2024 are stark, one thing remains the same: stock market investors are enthusiastic for a Trump presidency. $20 billion flowed into US equity funds on Wednesday, the biggest daily increase in five months, a day after he claimed a decisive victory in the presidential election, according to Bank of America Corp strategists and EPFR Global data.
Until now, while Treasury yields are higher and the risk of rising inflation remains acute, Wall Street experts see stocks as continuing to raise optimism that these policies will push Corporate America further ahead.
“I think you’re just going to see higher inflation, higher rates and higher stocks,” Catalyst Funds’ Miller said. “If people are willing to let inflation heat up, you can get stocks to run.”
