But Trump is “not against trade — he thinks a lot of these things have been unfair against America, and there are examples where that’s true,” Dimon said. “If there’s something unfair, it should be fixed. If we start making ourselves stronger at the expense of everyone else, there will be retaliation.”
JP Morgan CEO Jamie Dimon at the Asia-Pacific Economic Cooperation CEO Summit in Peru on Nov 14th 2024 (5 minute interview on YouTube here)
Reality set in the second half of the week, with the post-election “Trump Bump” fizzling. Investors adjusted their portfolios to reflect concerns of the economic policies of the incoming Trump Administration, lightening on risk and fleeing US Treasuries on Thursday and Friday. Although it is way too soon to draw conclusions at this point, investors are coalescing around the re-inflation trade, perfectly reasonable given Mr Trump’s combination of threatened across-the-board tariffs, forced deportations and overall fiscal irresponsibility. However, investors need to keep in mind that there are counterbalancing policies also on the table, including Mr Trump’s plans to attack the bloated US government and slash red tape by dialling-back regulation. Also, targeted tariffs are not unreasonable in select cases in which the US is being disadvantaged due to foreign subsides or other non-competitive behaviour, as Mr Dimon quite rightly pointed out during his APEC interview in Peru on Thursday (see opening quote). Regardless, punters seem to have adjusted their bets mid-week in the global stock and bond markets, as the euphoria of the Republican-controlled Executive and Legislative branches in the US gave way to the economic reality of the uncertain weeks ahead. US Treasury yields rose across the curve, not helped of course by ongoing strong economic data which means vanquishing the “last mile” of higher-than-target inflation remains difficult. Inflation remains a key economic concern of many Americans, an issue I continue to struggle to fully grasp given the exceptional economic growth and solid jobs market in the US since the pandemic.
If we look forward, I think that the bond market will crack first because history has proven that bond investors are more likely to be the “grown-ups in the room.” We are seeing the early signs of vigilantes fleeing US Treasuries as yields march higher. Higher yields almost always filter through to stocks of course, because companies will be forced to pay more on their borrowings. We saw investors take risk off the table last week as yields rose. Of course, fear of tariffs have also rattled countries around the world, including friends and foes of the US alike. The US Dollar has been ripping, not surprising as investors chase higher short-term US yields. And of course, a strong US Dollar (and corresponding weaker paired currencies) essentially exports US inflation and makes USD-denominated debt, especially for emerging markets countries, more expensive to service.
Perhaps I’m just having a bad day, but I am getting increasingly nervous. I have my S&P 500 hedges, intending to let them fall away in the 1Q25 as the new incoming administration gets in place and hopefully dials back some of their inflationary ideas. However, I am playing the fade in my portfolio at the moment, remaining long (but partially hedged), looking at grabbing short-duration yield, and writing short-dated covered calls on some of my stock positions to generate income. I also believe we are heading into a stock pickers market, which became apparent after the victory by president-elect Trump. Taking him at his word, investors must carefully consider his policies on each sector and each company, because some stand to benefit, and others stand to lose.
After two years of exceptional gains in equities in the US and – to a lesser extent – other global stock markets, we are in any event probably due a period of consolidation. Valuations remain stretched, and this makes expensive stocks vulnerable to value-destroying economic policies, bad economic data (even if “blips”), and belligerent rhetoric. Nonetheless, my advice to my readers is consistent and simple: stay long stocks and “adjust” around the edges, because timing the market is a fool’s game.
WHAT MATTERED LAST WEEK
US CPI for October came in more or less as expected, but validating that the last mile will continue to prove challenging. The BLS press release from Wednesday is here. It appears that shelter (housing) remains a major culprit, increasing 0.4% MoM. The graph to the right shows the trend of headline and core inflation over the last several years.
US PPI for October was more disappointing in that core PPI and services PPI both showed increases month-over-month although in line with expectations. The BLS press release from Thursday is here.
Largely in line with the CPI and PPI data releases for October, Fed chair Jerome Powell gave his views and was interviewed at the Dallas Regional Chamber of Commerce on Thursday. You can find the opening statement here, and the video of Mr Powell’s opening statement and his interview with The Washington Post’s Catherine Rampell here (YouTube, go to about 10 minutes in for start; over one hour total). Mr Trump’ comments were similar to those of other Fed officials who were on the talking circuit last week, implying (for what seems like the zillionth time over the last year or so) that the Fed’s anticipated path towards monetary easing might be slower than most investors are expecting. The CME FedWatch Tool is currently showing a 62% probability of a further 25bps reduction in the Fed Funds rate at the December FOMC meeting, and a total of only three 25bps reductions in the benchmark rate in 2025.
UK growth in Sept / 3Q24 was lower than anticipated. UK 3Q24 GDP grew a scant 0.1% in the quarter, following QoQ growth of 0.5% in the 2Q24 and 0.7% in the 1Q24. September GDP was especially poor, with the UK economy shrinking 0.1% MoM as UK consumers paused, waiting on the autumn budget that was released on October 30th. The ONS release for the UK’s 3Q24/September GDP is here, and the graph to the left depicts the rather erratic GDP growth since 1Q2023.
MARKETS LAST WEEK
There was nowhere to hide last week as global stocks and US Treasuries both got clobbered as yields drifted higher. Perhaps the only exceptions as far as the assets EMC tracks were Bitcoin, which continues to celebrate what might lie ahead during the upcoming Trump administration, and the US Dollar. With the US Dollar soaring, commodity prices are under pressure, clearly visible with gold which – in spite of reinflationary fears– has backed off its highs. All currencies feel under pressure and have generally weakened against the greenback, with the Sterling and the Euro now at $1.262/£1.00 and $1.054/€1.00, respectively. The Yen of course remains a major focus and area of concern, which is continuing to slip, now back above Y155/US$1.00. I am carefully watching the credit markets. Corporate credit spreads have so far have continued to be relatively resilient although all-in yields on corporate bonds cannot hide from higher underlying UST yields. Volatility in U.S. stocks as expressed by the VIX (16.14) and in US bonds as expressed by MOVE (102.47) remains relatively subdued, having retreated sharply from pre-election highs.
The tables below capture the performance of the indices and asset classes tracked by EMC.
MY TRADES LAST WEEK
I closed out my covered calls on Friday (expiry Nov 15th) on AMZN, AAPL and GOOG, and also covered calls on MSFT (expiry Nov 22nd), generating a decent (albeit) small amount of profit on all four positions. I left 472.5 covered calls (expiry Nov 22nd) open on BRK. I sold a sliver of AMZN into strength late in the week, but it remains a very large and core position. The stock is up 8% in the last month (even though sharply lower on Friday), so it has been a very nice run. I will write more calls on existing stock positions but prefer to do this on days when the market is strong rather than weak.
WHAT’S AHEAD
Economic data: Next week there will be October CPI releases from Japan and the UK. Retail sales for October for the UK will also be released. Preliminary PMI data for November will also begin to trickle out towards the end of the week for the US and Eurozone. The Michigan Consumer Confidence survey will be released on Friday.
Monetary policy meetings:
ECB: Dec 12
FOMC: Dec 17/18
Bank of Japan: Dec 18/19
Bank of England: Dec 19
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