Market Optimism Runs High, But What If Expectations Aren’t Met?
As the dust settles on the recent election, investors are betting big on a rosy future. The promise of lower taxes, reduced regulations, and increased spending on energy initiatives has sent major averages soaring, with the S&P 500 up around 3% in just a month. But what if these high expectations aren’t met?
The Risks of Inflation
One major concern is inflation, which has drifted back towards the Federal Reserve’s 2% target. October’s core consumer price index reading came in at a 3.3% annual rate, far from the desired target. If Trump’s policies spark a global trade war, it could reignite price pressures. And with the Fed’s main policy rate now in a restrictive range, it’s a different policy environment than when Trump took office in 2016.
A Cautionary Note
Investment strategists are urging caution, noting that Trump’s full goals may not come to fruition, and even if they do, the timing of their implementation is uncertain. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, advises clients not to overload on risk and focus on “broad balance and diversification.” Holly Newman Kroft, managing director at Neuberger Berman Private Wealth, recommends diversification and a focus on higher-quality names rather than chasing momentum.
Interest Rate Uncertainty
Another significant wrinkle is the impact of Trump’s agenda on interest rates. If economic growth and inflation pick up, it could change decisions on policy. Futures markets have recalibrated their expectations lower for the pace of interest rate cuts next year, now seeing the federal funds rate settling in a range between 3.75%-4%.
A Silver Lining?
Despite the uncertainty, some market veterans argue that it’s a good thing. Jim Paulsen, citing research on economic uncertainty, notes that markets are inversely correlated, meaning more uncertainty has led to higher stock prices. “Historically, when economic policy concerns have become as extreme as they are today… the negative fundamental fallout from excessive worries about the future direction of monetary and fiscal policies tend to be more than offset by support from a large Wall of Worry.”
Ebb and Flow
While near-term volatility is possible, Paulsen believes the market is simply experiencing a normal ebb and flow. “I don’t think we’re falling apart and I don’t think the market’s all that far ahead of itself so much as people think.”
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