Uncertainty Remains After An Eventful Month For Financial Markets

Last month was an eventful one for financial markets, beginning with the election results on Nov. 5. Once it became clear Republicans would likely win control of both houses of Congress and the White House — a “red sweep” — equity markets surged higher in anticipation of looser regulations and low tax rates, among other reasons.

Government bonds reacted just the opposite. Treasury yields surged higher in anticipation of higher issuance needs to fund a growing fiscal budget deficit. The increase in long-term Treasury yields actually began more than a month sooner, when speculation rose in the bond market that such an outcome was possible.

Despite the initial market reaction, the full economic implications of the election remain uncertain, particularly with Republicans holding such a thin majority in Congress. President-elect Donald Trump has emphasized tariffs and immigration as high priorities for his incoming administration. Most economists consider tariffs to be inflationary, but some of these inflationary pressures could perhaps be offset somewhat by greater domestic energy production — i.e., disinflation — as discussed recently by Thomas Barkin, president of the Richmond Fed.

The market also assumes a full extension of the 2017 Tax Cuts & Jobs Act (TCJA) as well as a potential reduction in the corporate tax rate. In the near-term, such a decision would be expected to reduce government revenues and increase Treasury issuance, assuming no equivalent government spending cuts. However, the devil is in the details, and timing matters. The TCJA does not expire until the end of 2025, so this will likely be a negotiation in Congress that could drag on deep into next year.

On the immigration front, there are some fears that a significant deportation effort could lead to another sharp imbalance between job openings and available labor, potentially fueling another round of wage inflation.

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Jason Haley joined ALM First in 2008 and is the firm’s chief investment officer. He heads ALM First’s Investment Management Group (IMG), which is responsible for leading the investment process and investment theme development. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.

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