(Bloomberg) — A sense of déjà vu swept Wall Street this week as Donald Trump’s election victory delivered a jolt to the stock market on par with what happened after his victory eight years ago. Small caps soared, banks jumped and the S&P 500 Index had its best election day in history and the strongest week in 12 months.
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The challenge, however, is that this is 2024, not 2016. A lot of things have changed since then.
“As Mark Twain once said, ‘History does not repeat itself, it often rhymes,’” said Matt Maley, chief market strategist at Miller Tabak + Co., LLC. “So investors should remember the old playbook, but not.”
When Trump ran for president in early 2016, US stocks were on shaky footing. They posted their worst start to a year since the financial crisis, falling more than 5% in January. By the time of his inauguration, the S&P 500 was up 9.5% in 2016 after ending 2015 in the red. The index traded at 17 times expected earnings. The 10-year Treasury yield was about 2.5% and the Fed Funds rate was 0.75%.
Eight years later, the landscape is very different. Stock valuations are rising. The S&P 500 is at an all-time high, surpassing 6,000 points for the first time ever after rising 56% over the past two years. The tech-hit Nasdaq 100 Index is also at a record after nearly doubling since early 2023. The S&P is trading at 23 times expected earnings, about 40% above its average since 2000. The yield on 10-year Treasury notes is 4.3%. and the Fed Funds rate is 4.75%.
In other words, the stock market was fairly well prepared to tear up at the start of Trump’s first term. But this time, shares appear to be at or near a peak, and there may not be much room left to go.
“It’s not what you would normally think — that rates are going way up, and that the stock market is going to rise substantially when rates go up — unless inflation goes up along with it,” said David Miller, co-founder and chief investment officer at Catalyst Funds. . “That, I think, is what happens.”
Inflationary policy
The premise behind traders’ reaction to Trump’s victory is that his promises of tax cuts and deregulation will continue to propel stock markets to new heights. The downside, however, is that the president-elect’s protectionist trade policies and plans for mass deportations of undocumented workers are seen as inflationary and potentially threatening growth.
“Trump’s victory will likely put upward pressure on inflation due to tariffs and immigration policies,” TD Securities strategists including Oscar Munoz and Gennadiy Goldberg wrote in a note to clients on Friday.
That explains why Wall Street forecasters revised down their expectations for how much the Federal Reserve will cut rates after the US central bank cut borrowing costs by a quarter of a percentage point on Thursday.
TD Securities predicts the Fed will suspend interest rate cuts in the first half of 2025 so it can assess the impact of Trump’s economic plans. Goldman Sachs Group Inc. had predicted rate cuts in May and June, but now expects them in June and September, which means a slower pace. And economists at Barclays Plc expected the central bank to cut rates three times in 2025, but cut that to two.
“The bond market will determine whether or not his policies can be implemented,” said Carol Schleif, Chief Investment Officer of BMO Family Office.
In the stock market, the differences between 2016 and 2024 were already visible before the elections. U.S. stocks outperformed their international counterparts in October, a rarity in an election year, according to Gina Martin Adams, chief equity strategist at Bloomberg Intelligence.
And now that the voting is over, the bias toward value is no longer as strong as it was in 2016, when the Russell 1000 Growth Index was roughly flat in three sessions after Election Day, while the Russell 1000 Value Index jumped. This time the opposite is the case: the growth index handily beats the value index.
Growth joins the party
At sector level, no group has seen a decline since the elections. In 2016, five of the eleven sectors fell between Wednesday, November 9 and the weekend.
The energy group is up 3.6%, adding to gains that made it the best-performing sector during President Joe Biden’s term, with gains of nearly 120% since his inauguration. In the days following the 2016 election, the sector was essentially flat, and fell by as much as 40% during Trump’s first term.
Despite the fact that the US has become the world’s largest oil producer under Biden, Miller Tabak’s Maley said most investors don’t realize that energy stocks under him performed so much better than during Trump’s first term. But he expects the sector to perform better this time.
Although the differences between 2016 and 2024 are large, one thing remains the same: stock investors are enthusiastic about a Trump presidency. According to strategists at Bank of America Corp. and data from EPFR Global, as much as $20 billion flowed into U.S. stock funds on Wednesday, the biggest daily addition in five months, the day after he won a decisive victory in the presidential election.
While Treasury yields are higher and the risk of rising inflation remains acute, Wall Street professionals so far see stocks continuing to rise on optimism that his policies will propel corporate America to further growth.
“I think you’re just going to see higher inflation, higher interest rates and higher equities,” said Catalyst Funds’ Miller. “If people are willing to let inflation run high, you can ensure that stocks follow along.”
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