Since the US economy began recovering from the pandemic, market veteran Ed Yardeni has been beating the drum that a new ‘Roaring 20s’ will power Wall Street.
With Donald Trump returning to the White House, Republicans retaking the Senate and the House likely to remain under Republican Party control, a decade of bullish returns not only seems more likely, but could have longer legs.
“It does indeed increase the likelihood that the good times will continue until the end of the decade and possibly into the 2030s,” Yardeni, the president of Yardeni Research, wrote in a note on Wednesday.
This decade is already off to a strong start. With the exception of a negative year in 2022, when the Federal Reserve began an aggressive rate hike cycle, the S&P 500 has delivered double-digit returns every year and is up nearly 26% so far in 2024.
It comes after markets had their best week in a year, soaring after Trump’s decisive victory, with a Republican win looking likely. This week, the S&P 500 rose 4.7%, the Dow Jones Industrial Average rose 4.6%, the Nasdaq rose 5.7% and the small-cap Russell 2000 rose 8.6% as investors bet on lower taxes and deregulation that would put further pressure on the economy.
“We stand by our investment recommendation to stay home rather than go global,” Yardeni wrote. “In other words, an overweight of the US in global equity portfolios.”
Of course, the roaring twenties of a century ago infamously ended with the stock market crash of 1929, which set off the Great Depression that would last into the 1930s.
And for his part, Yardeni sees different scenarios this century. But his vision of a new Roaring Twenties is the most likely with a 50% chance, while a 1990s-style stock market meltup has a 20% chance, and a 1990s-style geopolitical crisis 1970s with a possible US debt crisis a 30% probability. .
“But we consider increasing the chances of the Roaring 2020s scenario, as a smoother regulatory environment and lower corporate and income taxes under Trump 2.0 should boost investment and stimulate productivity-driven economic growth,” he added.
Yardeni has also warned that “bond vigilantes” will send yields higher as the outlook for US debt and deficits continues to deteriorate. Trump’s tax cuts and tariffs are also seen as inflationary, limiting the Fed’s ability to further cut rates.
But Scott Bessent, who has been floated as a possible Treasury secretary under Trump, has noted that lower energy prices and deregulation are disinflationary and could offset the potential inflationary effects of higher rates.
“We sympathize with that view, but would also add productivity growth to the mix,” Yardeni said. “A tight labor market plus continued investment in new technologies such as AI, robotics and automation will help contain unit labor costs and thus inflation.”
Others on Wall Street have also highlighted the potential for a new Roaring Twenties, including UBS analysts who said before the election that the probability of a booming economic cycle was 50%.
But Dan Ivascyn, chief investment officer at bond giant PIMCO, was more cautious about the effects of Trump’s policies on the economy and financial markets.
He told the Financial Times On Friday, he announced that the economy is in danger of becoming “overheated” under a second Trump administration, endangering interest rate cuts by the Fed and the stock market.
“It is not as simple and easy as a one-sided reflationary trade that risk assets should enjoy,” Ivascyn told The Guardian. FT. “You have to be a little careful what you wish for.”
This story originally appeared on Fortune.com
