Donald Trump's landslide victory has sparked a sharp jump in stock prices, and unleashed a wave of optimism that big cap equities, after already posting enormous gains this year, could keep pushing to new highs. In the nine days following the election, the S&P 500 surged over 4% to notch an all-time record close of 5949 on Thursday, November 14. Even after a big drop to end the week, the big cap index is still up over 3% since Trump clinched his overwhelming win. The business press is buzzing over Wall Street's great expectations for the Trump agenda that incorporates such pro-business proposals as slashing the corporate income tax and fostering a ramp in energy production. On November 18, a front page headline in the Wall Street Journal trumpeted that "Investors are Betting on a Market Melt-Up." The story related that money's pouring into equity funds at a rate rarely witnessed since the onset of the Great Financial Crisis.
But the media and the average folks and money-manager whales wagering on flush times ahead are missing the big overlooked story: The shocking, sudden rise in interest rates. This explosive shift, in the wrong direction, for a crucial long-term driver of stock returns is sending exactly the opposite message from the jubilation spread by the prospects for a second Trump term. As Warren Buffett has warned time and time again, bonds compete with stocks for investors' money, and when super-safe fixed-income provides puny yields, stocks, based on fundamentals, can be worth a lot more. Well, bonds just got far more lucrative overnight, for potentially worrisome reasons, and the outlook for equities just got a lot worse. But for now, animal spirts are swamping the bedrock basics that, over time, inevitably guide valuations.
