Analysis: Headwinds hit Trump-fueled rally in US stocks

Geo

18/11/2024 05:00

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      Post-election rally in stocks is fading
    

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      Rising yields challenge stock market stability
    

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      Policy uncertainty affects pharmaceutical and defense
stocks
    

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      Optimism persists due to strong earnings and growth
    

  
    By Lewis Krauskopf
       NEW YORK, Nov 18 (Reuters) - A U.S. stock rally fueled
by Donald Trump’s election victory is stumbling, as investors
contend with everything from renewed inflation worries to
uncertainty over the impact of the president-elect's policies.
    The S&P 500 fell 2% in the past week, erasing more than half
its gains from a post-election surge fueled in part by optimism
over the pro-growth policies that are a key part of Trump’s
economic platform. 
    Though the index remains near record highs and is up 23%
this year, some of that enthusiasm has been tempered in recent
days. 
    Bets that some of Trump’s policies could spur a rebound in
inflation and cloud the picture for further interest rate cuts
helped push the benchmark U.S. 10-year yield to its highest
level in more than five months on Friday, a potentially
unwelcome development for stocks.
        
    Worries over Trump’s cabinet selections and plans for
cutting bureaucratic excess have bruised the shares of
pharmaceutical companies and government contractors. Meanwhile,
Wall Street has little clarity on when, and to what extent, the
president-elect will implement his agenda. 
    While the market had rushed to price in the positive
outcomes from Trump’s economic policies, “I'm skeptical that
it's going to be that easy,” said Paul Nolte, senior wealth
adviser and market strategist at Murphy & Sylvest Wealth
Management.
         A Trump spokesperson did not immediately respond to a
request for comment.
    Trump has previously said that his trade policies - which
call for pricey tariffs on goods not only from rivals such as
China but allies such as the European Union - would revitalize
American manufacturing and yield enough revenue to ease concerns
about ballooning the deficit or increasing inflation.
       
    EYES ON YIELDS
    Rising yields are one of the market’s chief concerns,
because they offer investment competition for equities while
raising the cost of capital for companies and consumers.
    The benchmark 10-year yield - which typically moves with
interest rate expectations - has surged about 90 basis points
since mid-September as investors curtailed bets on how deeply
the Federal Reserve will cut borrowing costs in the face of
robust growth that could stoke an inflationary rebound. 
    Until recently, stocks may have been able to shrug off the
rise in yields because it had been driven by
stronger-than-expected economic data. But many of Trump’s
policies - from tax cuts to tariffs - are seen as inflationary,
and could keep yields climbing past the 4.5% level that some
investors have flagged as a potential trigger for stock market
unease. 
     The yield touched 4.5% on Friday before settling lower.
    "If yields continue to trend up and they don't find their
ceiling, I think it will become a problem because it will
basically translate into a tighter monetary environment," said
Irene Tunkel, chief U.S. equity strategist at BCA Research.
        Fed Chair Jerome Powell on Thursday said there was 
    little need
     for policymakers to rush to cut rates, given solid economic
growth and inflation above the central bank’s 2% target. The
comments 
    weighed on stocks
     and pushed bond yields higher.
  
    As yields have risen, the relative attractiveness of
equities compared with U.S. government bonds, which are seen as
risk-free if held to term, has dimmed by some measures. 
    The equity risk premium, which compares the S&P 500 earnings
yield against the 10-year Treasury yield, is at its lowest level
since mid-2002, said Keith Lerner, co-chief investment officer
at Truist Advisory Services.
     
    POLICY UNCERTAINTY
    Uncertainty over the timing and ultimate impact of Trump’s
policies has also grown. 
Shares of Pfizer  PFE.N , Moderna  MRNA.O  and other drugmakers
fell at the end of last week after Trump picked vaccine skeptic
Robert F. Kennedy Jr. to lead the Department of Health and Human
Services.
Defense and government contractor stocks including Leidos
Holdings  LDOS.N  and General Dynamics  GD.N  also fell, as
investors fretted about the fallout from a new government
efficiency entity led by Tesla  TSLA.O  CEO Elon Musk.
    Kennedy, a cabinet pick, still has to be confirmed by Senate
lawmakers, while the extent of any spending cuts stemming from
the efficiency entity is unclear.
    Nevertheless, the uncertainty has pushed some investors to
"sell first, ask questions later," said King Lip, chief
strategist at BakerAvenue Wealth Management.
    Meanwhile, strategists at BofA Global Research said the
risks to their forecast of 2.3% economic growth next year were
“very large in either direction” given the lack of clarity over
which aspects of Trump’s policies will be prioritized.
    Growth could shoot above 3% if the administration focused on
fiscal easing and deregulation, the bank’s strategists wrote on
Friday. But a hard pivot to tariffs could spark a trade war and
eventually pull the economy into a recession, they said. 
    Of course, some so-called Trump trades are still sporting
huge gains. Shares of Tesla  TSLA.O , which have risen on bets
that Musk’s close association with the president-elect will
benefit the company, are up 28% since Election Day.
Bitcoin, lifted by hopes of crypto deregulation, was up over 30%
as of late Friday. 
    At the same time, stocks have tended to perform well at
year-end, with the S&P 500  .SPX  up an average of 3.3% in the
last two months of presidential election years since 1952,
according to Truist’s Lerner.
    That is cause for continued optimism, along with strong
corporate earnings and a healthy growth backdrop, said Ross
Mayfield, investment strategist at Baird Private Wealth
Management.
    "There is a lot else working for the market," Mayfield said.

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Stocks vs yields    https://tmsnrt.rs/3Z9rSGX
Trump trades    https://reut.rs/3Z6NmnK
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 (Reporting by Lewis Krauskopf in New York; Editing by Ira
Iosebashvili and Matthew Lewis)
 ((lewis.krauskopf@thomsonreuters.com; Twitter: @LKrauskopf;))