On Wednesday, the U.S. stock market hit a new historical high again, with the S&P 500 index hovering around 5930 points, marking the 48th historical high of the year. The Nasdaq 100 index rose 2.7%, achieving its first record since July. The Dow Jones Industrial Average climbed 3.6%. U.S. Treasury yields surged, and the dollar recorded its best performance since 2022, as investors predicted Trump's return to the presidency and the likelihood of Republicans winning both houses of Congress.
The S&P 500 index rose 2.5% as the market bet on the newly elected president implementing growth-friendly policies, thereby boosting U.S. companies. Data compiled by Birinyi Associates Inc. and Bloomberg showed that the S&P 500 index achieved its best historical performance post-election. Small-cap stocks surged by 5.8% as the market speculated they would benefit from Trump's protectionist stance, while bets on tax cuts and reduced regulation boosted bank stocks. Insurance companies focused on the Medicare market jumped as they anticipated the new government would pay higher rates to companies providing private medical plans for seniors.
Wall Street's 'fear index' VIX recorded its largest drop since August. Nearly 19 billion shares changed hands on U.S. exchanges, which is 63% higher than the average daily trading volume over the past three months. The Dow Jones Transportation Average surged to new highs after three consecutive years without reaching historical highs, ultimately confirming the strong performance of its industrial index. For followers of the Dow Theory, this breakout is a bullish signal, as the simultaneous rise of the two indicators suggests a better outlook for the entire market.
David Bahnsen, Chief Investment Officer of The Bahnsen Group, stated: "Currently, investor sentiment supports growth, supports regulation, and supports the market. There is also a hypothesis that M&A activity will accelerate, more tax cut policies will be introduced, or existing tax cut policies will be extended. This creates a strong backdrop for the stock market."
U.S. Treasury yields rose across the board, with longer-term yields leading the way as traders reduced bets on the extent of Fed rate cuts. Investors doubled down on policies like tax cuts and tariffs that could trigger price pressures. These measures also indicate concerns that Trump's proposals may exacerbate the budget deficit, stimulating an increase in bond supply.
The yield on the 10-year U.S. Treasury rose by 17 basis points to 4.44%. The dollar index increased by 1.3%, with the yen declining the most among major currencies, and the euro falling by 1.8%. The Mexican peso was nearly flat after a 3.5% drop. Bitcoin is seen by many as part of the so-called Trump trade, as he supported digital assets during his campaign, and Bitcoin reached an all-time high. Commodities came under pressure, with declines in gold, copper, and oil prices.
"The biggest takeaway from last night is that we gained the certainty the market craved," said Ryan Grabinski of Strategas. "This will boost the confidence of both businesses and consumers. Attention should now shift to tomorrow's Federal Reserve meeting. The yield on the 10-year Treasury is approaching 4.5%, a level where risk assets have encountered some trouble over the past 24 months."
Keith Lerner of Truist Advisory Services Inc. stated that many investors are preparing for long-term uncertainty, and the clarity of the outcome has provided some relief. He noted that the market currently seems more focused on the positive aspects of Trump's agenda and is less concerned about potential tariffs and broader policy outcomes.
He pointed out: "Although the market backdrop is complex, factors like interest rates, deficit worries, the likelihood of fewer Fed rate cuts, and tariffs may ultimately offset upward price pressures today, the market is pricing in most of the positive factors. Nevertheless, a significant amount of evidence in our work suggests that the bull market still has some duration, and we maintain an upward trend in the primary market."
Thierry Wizman of Macquarie said traders must be careful not to push the 'yield story' too far. "If Trump brings surprises in the coming months (at least relative to exaggerated expectations), it will be about fiscal restraint, not fiscal irresponsibility. When the market realizes this, long-term U.S. Treasury yields may stabilize or decline."
In the view of Mark Haefele at UBS Global Wealth Management, the bond sell-off has gone too far. He expects the Fed to continue on the path of lowering interest rates.
It is widely expected that Federal Reserve officials will lower the benchmark interest rate by 25 basis points on Thursday, following a 50 basis point cut in September. According to the median estimates published in September, they anticipate another 25 basis point cut in December this year and a one percentage point cut in 2025.
"The Federal Reserve may still cut rates by 25 basis points at Thursday's meeting and potentially cut again in December," said Yung-Yu Ma of BMO Wealth Management. "Entering 2025, we believe there may only be two to three rate cuts for the entire year, depending on the combination of policy and economic growth."
The hope for the Democrats to control the U.S. House of Representatives is dwindling, and Republicans are increasingly confident of unifying control of Washington before next year's tax and spending showdown.
The Democrats only need to net gain four House seats to regain a slim majority from the Republicans, but the Republican victories in Pennsylvania, Michigan, and North Carolina offset losses in New York, giving the party a significant lead in the battle for control of the House.
According to CFRA's Sam Stovall, the 'red wave' of Republican control over the executive and legislative branches has only occurred eight times since World War II. He stated that in these cases, the annual average price increase of the S&P 500 index reached its highest level during Republican presidential terms, at 12.9%, with an increase frequency of 75%. The best return rate during Democratic presidential terms occurred only six times in a divided Congress, during which the S&P 500 index averaged a rise of 16.6%, with 83% of the time being in an uptrend.
"Assuming the House belongs to the Republicans, we expect the outcome of the 'red wave' to resemble the 2016 script, but due to a more mature economic backdrop and higher stock valuations, the degree will be lessened," said Jeff Schulze of ClearBridge Investments. "Trump's pro-business stance could reignite animal spirits in companies."
Schultz said this could lead to a stronger capital expenditure and investment environment. A more favorable corporate tax system, a comprehensive extension of the Tax Cuts and Jobs Act, and looser regulatory measures should offset the potential adverse effects on corporate profits from increased tariffs and reduced immigration.
Schultz noted: "We expect that cyclical sectors will continue to lead in the coming months as the market anticipates stronger economic growth, and the profitability of these companies will exceed current pricing."
Ma of Bank of Montreal stated: "Favorable macro drivers still dominate, and the prospects of a Republican sweep and tax cuts have increased market enthusiasm. In the coming weeks, more details on tariff policies or a sustained rise in long-term Treasury yields could temper this enthusiasm, but for the past two years, we have been saying that the current environment favors taking risks, and that remains true."
Moreover, he pointed out that a Republican sweep may extend individual tax cuts, but this is only a slight positive for the stock market.
Ma summarized: "The significance of corporate tax cuts is much greater, although some have promised to do more in this regard, these tax cut provisions are not clear, including requirements for companies to keep production in the U.S."
The stock market surge triggered by Trump's victory is activating buy signals for rule-based investment funds, further fueling the rally.
Scott Rubner, a strategist at Goldman Sachs, wrote in a report to clients on Wednesday: "The year-end rebound will start from today, potentially exceeding investors' expectations." Behind this, he cited factors such as "unwinding election hedges, re-leveraging, buybacks, FOMO (fear of missing out), and Vanna." Vanna refers to a buying behavior associated with options contracts expiring regularly.
Nomura's analysis shows that volatility control funds are expected to buy $50 billion in U.S. stocks next month, totaling $110 billion by January.
Ryan Detrick of Carson Group said: "The market hates uncertainty, and now that the election is officially over, the stock market surged today. Optimism about tax cuts, the Fed's dovish stance, and the potential for economic improvement are among the reasons, but the reality is that the economy has been quite robust throughout the year, so this is really not new. Our view is that we are returning to a normal bull market."
At Ameriprise, Anthony Saglimbene indicated that as the election suspense dissipates, investors are eager to put excess cash into the stock market, and animal spirits will drive major indices higher by year-end. "Ultimately, the U.S. stock market may not only be influenced by the election results but also by volatility hedging, as companies come out of their buyback blackout periods following the earnings season, along with the strong seasonal factors in the fourth quarter, especially in election years."
Chris Senyek of Wolfe Research said he remains optimistic about the stock market by the end of the year. He stated: "With Trump winning the 47th U.S. presidential election, we believe the market will strongly favor financials, U.S. industrials (transportation), energy, and cryptocurrencies today and by year-end. We also expect more aggressive tech stocks to perform well. By style, we will hold value, equal-weight, small-cap stocks, and those that have underperformed year-to-date."
Article reposted from: Jin Ten Data
