The swift resolution of US election uncertainty encouraged investors to dust off their 2016 playbooks and increase procyclical exposure in expectation that history will rhyme (if not repeat). While we believe that investors may further embrace Mark Twain’s associated surmise in the near-term, market participants should heed Heraclitus’ observation that one cannot step in the same river twice. The initial conditions facing the incoming Trump administration – including the growth, inflation, fiscal policy, and market pricing backdrops – are vastly different from those inherited in 2016 and similar economic policy initiatives will likely yield different macro and market outturns. We will be monitoring for instances in which investors may be mistaking past for prologue.
Fiscal: A big issue
As we enter the second Trump administration, both nominal GDP growth and fiscal deficits are running at approximately double their 2016 pace meaning that similar stimulus would likely beget a different response. A key difference in initial conditions relative to President Trump’s first term is the Treasury financing backdrop – both interest rates and the amount of bond issuance are far higher than first time around. In 2016, net issuance by the U.S. Treasury amounted to $700 billion; in 2024 that figure will be $2.3 trillion. At $823 billion, the planned issuance in Q1 next year will be the highest figure ever for the first quarter, and the third highest quarter of issuance ever (behind only the pandemic and Q3 2023). Judging the impact of Treasury supply by incorporating the duration of that debt is potentially more accurate as issuing a 30-year bond has a much greater effect on fixed income markets than issuing a 3-month bill with the same face value. Yet, as the chart below shows, the punchline is the same: The current level of duration supply remains elevated despite a robust economy and is on track to reach a new high next year even before we consider any measures of the new administration that may be, on net, fiscally expansionary. Against this backdrop, it’s perhaps not surprising that the Treasury Secretary nomination process took longer than other roles.
U.S. fiscal net insurance in 10yr equivalents
Source: BlackRock, GTAA, Bloomberg, as of November 2024
Corporations may be front-running tariffs
Tariffs have been top of mind for investors seeking to understand the potential economic impact of the Trump administration. One notable difference relative to 2016, however, is evidence of tariff-induced frontrunning already occurring throughout 2024. The chart below shows that import volume in U.S. West Coast ports has been running significantly higher than last year despite a relatively stable demand backdrop. We believe this may have created an illusory acceleration in growth over recent months that could continue into year-end, however, we believe the trajectory of global demand after this remains less clear. We will be paying close attention to U.S. domestic and global policy announcements with a particular focus on the prospects for Chinese fiscal stimulus.
Import Volumes at LA-Long Beach
Source: BlackRock GTAA as of November 2024.
What’s priced?
The evolution of market pricing is an adaptive process and lessons have clearly been learned from the 2016 experience. As the charts below shows, markets initially perceived the first Trump election outcome to be a disinflationary shock with both equities and bond yields falling. This stands in clear contrast to 2024 as macro markets immediately embedded greater reflationary expectations. This leads us to believe that investors have already embedded relatively high hopes for a benign reflationary impact with stock prices and bond yields moving higher. In our view, the risk to equity pricing remains that macro investors rapidly shift their views away from the soft landing narrative that dominated the conversation during the middle of the year to a more inflationary, no-landing perspective which could induce a more positive stock-bond correlation with bond prices and equity prices falling in tandem.
Election Wednesday aftermath: US 10-yr yield and S&P 500
Index performance is for illustrative purposes only. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.
Source: BlackRock, GTAA, as of November 2024
What does it mean for portfolios?
In our global multi-asset portfolios, we remain procyclically positioned and increased the size of our long-dated fixed income underweight following the U.S. presidential election. The more robust nominal growth conditions of 2024 relative to 2016 will likely ensure that a similar combination of incremental fiscal stimulus and protectionism would put more upward pressure on inflation than previously observed. Additionally, with government financing needs already elevated, further sovereign debt issuance could cause investors to demand additional compensation at the long-end of the yield curve. From a currency perspective, although market attention to tariffs has supported post-election US dollar strength, we believe that pre-emptive Federal Reserve monetary easing and ongoing US fiscal largesse should act as a tailwind to procyclical currencies relative to the U.S. dollar.