Donald Trump’s presidential election win has sparked a sense of déjà vu among investors, with stocks and the U.S. dollar surging while Treasury bonds have weakened—mirroring the so-called “Trump trade” seen in 2016. However, financial expert David Rosenberg of Rosenberg Research cautioned that significant differences between 2016 and 2024 could create a vastly different scenario for investors who overlook these contrasts.
In a note released Thursday, Rosenberg highlighted that while current market behavior closely resembles the reaction in 2016, it may not be sustainable. “Just one day after the election, we see the old playbook being followed to the letter. But will it endure? The environment was much more favorable back then,” he remarked.
Wednesday saw a notable rally as investors embraced “Trump trades” in full force. The surge in the stock market outpaced the post-Election Day jump in 2016, when Trump triumphed over Hillary Clinton. The S&P 500 gained 2.5% on Wednesday, marking its best performance after an election on record, while the Dow Jones Industrial Average rose over 3%, the most substantial post-election move since 1896, according to Dow Jones Market Data.
Rosenberg pointed out several key differences between the two periods:
- Market Sentiment: In 2016, Market Vane’s bullish sentiment reading was 60, compared to the current high level of 70, which he described as “frothy.”
- Stock Valuation: The S&P 500’s forward price-to-earnings ratio was 17x in November 2016, whereas it now stands at 22x, indicating stocks are more expensive.
- Credit Spreads: High-yield spreads were 500 basis points in 2016, compared to 280 basis points now. Investment-grade spreads have also tightened from 150 basis points in 2016 to 85 basis points today.
- Treasury Yields and Fed Policy: The 10-year Treasury yield was 1.8% in November 2016, breaching 4.4% on Wednesday. The federal funds rate was near zero at 0.5% in 2016, with only room to rise. Currently, it sits at 5%, indicating it is more likely to decrease, albeit with uncertainty surrounding the pace and extent.
- Real Interest Rates: The market in November 2016 benefitted from a real risk-free rate of 0%. Now, the inflation-adjusted rate is above 2%, posing a considerable difference.
- Economic Cycle: In 2016, the economy was “midcycle” with unemployment at around 5%. Today, it is in a “late-cycle” phase with unemployment closer to 4%, signaling tighter capacity constraints.
- Fiscal Conditions: The deficit was 3% of GDP in 2016, with total debt near 100% of GDP. Currently, the deficit exceeds 6% of GDP, with debt nearing 130%, creating a significant fiscal burden. Rosenberg noted that while investors are enthusiastic about potential tax cuts, they may be ignoring this fiscal “straitjacket.”
- Debt-Service Costs: Debt-service costs took up just over 10% of government revenue in 2016. Today, that figure has doubled, with projections indicating it could exceed 30% within two to three years. This, Rosenberg warned, could lead to failed Treasury auctions, a sharp drop in the dollar, and potential credit-rating downgrades, threatening the U.S.’s reserve-currency status.
Rosenberg concluded that while investors may currently be overlooking these fiscal and economic pressures, the long-term impact could pose significant challenges. “This structural debt and deficit dilemma is not on anyone’s mind right now,” he noted, but once debt-service ratios surpass 30%, the consequences could be destabilizing.
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