Navigating the Trump trade: insights from Jurrien Timmer
The recent rally in the equity markets has caught the attention of many investors. With the Dow Jones surging to record highs and the S&P and Nasdaq showing gains, the current momentum is undeniable. According to Jurrien Timmer, Fidelity's Director of Global Macro, these movements are a direct effect of the recent election outcomes, leading to a sector rotation and a stronger dollar. The primary question that arises is whether investors should follow or fade these recent trends.
Market repricing and sector rotation
Financials, energy and industrial sectors have all benefitted from Trump’s assumed pro-growth policies. Small caps and Bitcoin saw the strongest performance gains since the decisive election results. The move was prompted by the midterm election results, which removed some political risk and restored some stability to markets.
However, Timmer warns that while the initial reaction was positive, the market's future direction remains uncertain. Investors are now left to ponder whether to follow the momentum or adopt a more cautious approach. Over the next two years, historical data suggests a favorable environment for market performance following an election sweep, regardless of the party in power. Yet, the potential challenges related to fiscal policies and debt ceilings could temper this optimism.
Broader market participation and earnings growth
Timmer highlights a notable shift in market breadth. Unlike typical bull markets that start broad and narrow over time, the current cycle began with a narrow focus on the so-called "magnificent seven" tech stocks. It has only recently begun to broaden, including a wider array of stocks in the uptrend. This broadening participation is a positive sign for market health, indicating a more robust and inclusive growth pattern.
The third quarter saw an above-average share of companies surprise to the upside, with 71 per cent posting earnings that were better than expected. Timmer says the earnings trends overall are still positive and he expects them to carry into 2025. But the impact of fiscal policy - including any potential deregulation or tax cut extensions - is far from certain, and the market may be prematurely betting big on a favorable outcome.
Interest rates and the role of the Federal Reserve
Interest rates and monetary policy continue to play a crucial role in market dynamics. The Federal Reserve's recent rate cuts aim to move closer to neutral without being overly restrictive. However, Timmer suggests that the Fed may need to maintain a cautious stance, especially if the economy receives a significant boost from fiscal policies, which could lead to inflationary pressures.
Timmer's analysis indicates that neutral rates are likely around 4%, with inflation expected to stabilize. The concept of "term premium"—the risk premium for bonds—also becomes relevant in this context. With the Fed no longer engaging in quantitative easing to the same extent, rising term premiums could lead to higher yields. This shift could present headwinds for the equity market, as higher bond yields would compete more effectively with stock returns, potentially slowing down the market's upward momentum.
Final thoughts
Overall, Timmer's insights provide a comprehensive view of the current market landscape. While the election outcomes have driven significant market movements, the future remains uncertain, with several variables at play. Investors must carefully weigh these factors, considering both the potential for continued gains and the risks associated with fiscal and monetary policies. As always, maintaining a balanced perspective and staying informed will be key to navigating the evolving market conditions.
