Since Donald Trump’s election victory two weeks ago, interest rates have risen moderately, with analysts forecasting a potential increase in yields over the coming months. What does this mean for the stock market and the broader economy? To begin addressing this, we can model the potential outcomes by examining historical data from 1960 concerning changes in interest rates and three major macroeconomic variables.
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Last week, US high-yield bonds led among the major asset classes based on a selection of representative ETFs. Despite a week of rising interest rates, the increase in investment-grade yields—particularly Treasuries—outpaced advances in junk bonds. Consequently, the spread between high-yield bonds and Treasuries (as indicated by the BofA Merrill Lynch Option-Adjusted Spreads Index) shrank slightly, resulting in a rise in junk bond prices during the past week.
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● The Great Convergence: Information Technology and the New Globalization
By Richard Baldwin
Review via The Economist
Bill Clinton once referred to globalization as “the economic equivalent of a force of nature, like wind or water.” It compels nations to specialize and exchange, ultimately enriching them and compressing the world. In “The Great Convergence,” Richard Baldwin, an economist from Geneva, adds a crucial detail: like natural forces, globalization is potent yet can be erratic or even detrimental. If cherished ideals fail to align with reality, policymakers risk making severe missteps.
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The risk of recession in the US remains low following several encouraging economic indicators. Notably, retail sales and residential housing construction showed strong numbers for October. While industrial output remained flat last month, its mild negative annual trend is moving closer to zero, supported by modest growth in the manufacturing sector. Moreover, the labor market appears poised for continued growth, with payrolls consistently increasing in October and recent data indicating a drop in jobless claims to their lowest level since 1973.
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Are you anticipating a recession soon? It seems so, given the constant barrage of predictions suggesting a downturn is just around the corner—year after year. Various “experts” have maintained that the US has been on the verge of contraction since the last recession ended over seven years ago. Yet, despite this, the US economy has continued its uneven expansion, yielding results that fall short of historical averages. At present, the recovery that commenced in mid-2009 remains intact, as indicated by the latest figures available.
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An encouraging rise in retail sales for October further undermines claims of an impending US recession. Consumer spending rose by a robust 0.8% last month, boosting sales by 4.3% compared to the same period last year—the most substantial increase in nearly two years.
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When has a Nobel Prize-winning economist inadvertently made a compelling case for detaching political views from business cycle analysis, opting instead for a quantitative-based approach to estimate recession risk? Just last week, Paul Krugman wavered between forecasting a global recession and retracting that warning within a span of two days, reminiscent of an “nevermind” moment similar to Emily Litella.
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The recent election of Donald Trump triggered significant selling across global markets, as reflected by ETF proxies representing the major asset classes. However, US equities showed resilience, achieving a strong gain during the five trading days leading up to November 11. Stock markets in developed countries also experienced slight increases, while prices generally declined elsewhere last week.
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● An Extraordinary Time: The End of the Postwar Boom and the Return of the Ordinary Economy
By Marc Levinson
Summary via publisher (Basic Books)
An esteemed economic historian explores the abrupt end of the postwar boom in the early 1970s, which sparked a period of political and financial upheaval that we continue to experience today. The decades following World War II represented a golden age for many, characterized by economic miracles where steady jobs and improving living standards were commonplace. However, beginning around 1973, the good times vanished, leading to a global economic slump followed by slow and erratic growth reminiscent of pre-war conditions. This period of anxiety, uncertainty, and political extremism still influences us today.
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While the implications of a Trump presidency for the US economy remain unclear in the medium to long term, one thing is certain: sentiment in the Treasury market is unambiguous. The 10-year yield surged to its highest level since January within the two trading days following the election of the billionaire reality television star to the White House.
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