Name: Here's How the 'Trump Trade' Will Affect Stocks and Bonds
Uploaded: 2016-11-30
Duration: 6 min 49 s
Description: According to our panel of investment experts

[ SOUND ] [ BLANK_AUDIO ] So let's start by talking about the elephant in the room, what people on Wall Street have been calling the Trump Trade. Raise your hands if you successfully predicted the election results in mid October. For the record, no hands went up. No hands went up. I did not predict it either, of course. Donald Trump surprised the pundits, surprised most of the media by winning the election. Since then, stocks have been rallying and you've been seeing bond prices falling pretty sharply. What are investors anticipating and reacting to? What do these moves reflect? These moves reflect a change in conversation, and change in the tone for the markets. For the longest time, we have been talking about disinflation and deflation. All of the sudden somebody comes in and wants to reclaim the word. And that has changed the mode for the market. At least for the U. S. for sure. Heather, how are your clients and your team reacting to this? [ CROSSTALK ] Yeah, we are certainly looking at this as a regime change. I think that the equity market performance post election Really reflects an optimism about growth. Mm- hm. Particularly about earnings growth and lower taxes. And to Christian's point, the back up in rates is really a reflection of higher inflation expectations. The good news is, that business confidence has improved, consumer confidence has improved, and so how that actually moves through the real economy It's ultimately the key question from an investor's perspective today. Sebastian, I knew just earlier this morning you had a big strategic call with some of your team at T. Rowe Price. What are some of the things that you're talking about with relation to the Trump Trade? You can take the glass half- full view or the glass half empty, and as you would expect, Nowadays equity investors are taking the glass half full view and focusing on tax cuts and pro- growth policies, spending. Bond investors are taking a bit more of the glass half empty view. The interesting thing is that the sentiment, if you look at implied volatility, a measure of sentiment in both markets, is going in different directions for stocks and bonds. The stock- implied volatility is down 25 % since the election result. Bond- implied volatility is up 30 % since the election result. Typically, those indicators are 80 % correlated. So perhaps the Trump trade is a bit overdone if you take the glass half empty view. And perhaps the market is underestimating the number of shovel ready projects for fiscal spending, a compliant congress. And maybe underestimating the impact of trade restrictions and in general less immigration which is not very good for growth. Um- hm. So when you're talking about the differences, volatility just to sort of explain for leaders who are in viewers who are less familiar with the terminology, talking about implied volatility going down for stocks essentially means that investors think as stocks have suddenly become somewhat less risky. And vice versa, bonds more risky. That's right, this is the & nbsp; [ UNKNOWN ] & nbsp; so it's measured from implied volatilities to volatilities that are implied by option prices. We think uncertainty has gone up actually, not down. And the way we think about it is that The outcomes are more extreme now on both sides. Mm- hm. On the upside and on the down side. Well there are some truth to that. That's uncertainly has certainly gone on up, I think burn [ UNKNOWN ] has. Has gone up because bond volatility was very low to begin with. So it's really more about bond volatility coming in sink with what is in the equity market. So I personally wouldn't read too much into it that in on of itself is telling you if the uncertainty in the marketplace has gone up. I think the high bond volatility is telling you Is we were expecting rates to remain low and constant and that is not going to be the case anymore. Bill, I just add- Yeah, please go ahead. One thing to that is many people, many clients have asked us about VIX and about equity market volatility. And it's remained low for a multi year period [ INAUDIBLE ] now. But I would agree with the comment that I think you have to look through volatility To draw downs in the market. And so, while it looks placid, you have seen dips, 10 % drops in the market. And so, August of last year is a good example. Again in January of this year, you saw a move after the Brexit. And so, you are seeing draw downs in the market. But the overall VIX level is suggesting a little bit more neutrality than you would expect. Mm- hm. But what's more interesting is what's happening beneath the surface. We're talking about markets in general, but there's been this titanic shift from the more economically defensive Companies and consumers staples, utilities, intrastate, sensitives. We call a long duration stocks meaning they pay out and come over a long periods. Those have fallen in favor and this been amplified post the elections already started in the US market last February and it had its. Start and then set back with Brexit in June but begun again around August of this year overseas and those stock, those values stock the more fiscal, the more financially oriented. They're continuing to respond as if this election gave then another boost which they deserve. and you are a specialist, of course in technology, which is somewhat outside of a lot of the economic cycles that we're discussing, but how are you seeing reaction to the auction playing across the companies that you watch most closely? Well, there are a number of issues that the tech companies are concerned about. Net neutrality is probably number one. Immigration plays very heavily, all of these companies are global. We frequently fund companies that have immigrant cofounders. We also look ahead to IT budgets and those have been growing steadily over the last few years. And the growth of these companies depends upon companies feeling confident about increasing or maintaining their spending on IT. In addition, the companies also really need to To look ahead to open IPO windows. And we've had that window slowly open here in 2016. There are a number of great companies, that are capable of being public companies in 2017. And the market dynamics will really shape the public markets for new entrants. And that's uncertain. [ SOUND ] [ BLANK_AUDIO ] [ SOUND ]

According to our panel of investment experts