- Bonds at Risk: Core Bond holdings fall, yields spike, while High Yield largely unaffected
- US stocks soar, with small caps trading 2X the broader market.
- International stocks fall (EAFE down 1.5% at this writing) in a shocking divergence from US equities
- Most important – The assumption of FED easing over the next 18 months may no longer be valid
The Election is, in our view, the most consequential driver for the Markets this year. Here’s what has changed in the past 24 hours:
Bonds
The most important change, as I have discussed in the financial media over recent weeks, is the possible change in the FED’s trajectory. Notably, yields have diverged from the FED’s stated direction, potentially imperiling further gains or generating losses in investment grade bonds. The question du jour is, how far does this trade go? With the 10-year yield currently at 4.3%, it appears potentially headed to the yearly high of 4.7%. In these instances, cognitive dissonance suggests this might be peak. However, market perceptions of a stronger economy and the possible reignition of inflation through tariffs can drive yields up, even before a presidential transition takes place.
Our High Income strategies are currently allocated in either High Yield Bonds (which are trading slightly higher today) or in short term T-bills.
US Stocks
As the results began to favor Trump last night, stock futures surged, and today most sectors are following through today with significant gains. Notably, small caps traded up nearly six percent near the close. The key question now is the endurance of this rally. On one hand, there’s the potential boost from lower taxes and reduced regulatory burdens; on the other, the headwinds of higher rates.
Over the past year, rising yields at the level that we are seeing would have slammed the brakes on stock gains. Not today. The most important contemplation of all, in our view, is the possibility of Smoot Hawley level tariffs, which we feel would ultimately wreck everything, including bonds and stocks. This creates the greatest unknown coming into 2025.
Our US stock strategies are currently in a bullish posture. Furthermore, our managed risk strategy holds no short calls positions that might compress growth.
International Stocks
For those who argue that tariffs are just a negotiating tool that will never be enacted at the levels proposed, it would be difficult to explain the unusual drop in the EAFE index of 1.5% on the same day that the S&P is rallying over 2.5%. This divergence appears to be directly related to policy changes by the new administration.
Due to the downtrend in international stocks over the past few weeks, our Intl. Stock allocations are fully defensive in short term T-bill positions.
Our advice for the remainder of the year is three fold:
- Be agile in your fixed income portfolios
- Be long US equities, but hedge to address contingencies coming into the new y
- Understand that current bullishness may not translate into a positive setup coming into 2025
ear
For a video version of my discussion on tariffs, see a conversation I had on Bloomberg TV. Watch the full Bloomberg TV episode here: https://lnkd.in/gEsfdpsi
For those who have access, I’ll be appearing on CNBC Asia tonight at 8PM Eastern.
Best,
Felipe
All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
This market update is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice, and no representation is being made as to whether the information provided herein would be beneficial for any or for a specific Employer Benefit Plan or investor.
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