Stocks and bonds have very different ideas about where the US economy is going.
In the bullish corner are stocks. Adding furiously to their value since the election of Donald Trump, stocks are behaving as if the US economy is inflationary, that the new administration will spark a period of impermeable growth.
In the bearish corner are bonds. In the post-election world, bonds have shed half of their value. Here, the logic is that the US economy’s recovery is feeble and that one wrong move, such as tackling the $4.5 trillion balance sheet, could set off a recession.
One of the biggest questions facing investors today, is which sentiment o follow – the bullish stocks or the bearish bonds?
Perhaps the answer cannot truly be known until president Trump reveals details about his pro-business agendas. The pressure on the Trump administration to deliver a cohesive plan has mounted.
Today, Trump may give some much-needed clarity to investors. The US president is set to announce an overview of his proposed tax reform plan. Throughout his campaign trail, Trump vowed to lower corporation tax from 35 to 15 percent.
A decrease in corporation tax would increase earnings per share, thus strengthening earnings reports. A move like this could justify the tax cut by stimulating growth, as well as providing a convincing cause for the increase in equity prices.
US earnings per share estimates are outperforming US economic growth forecasts. Therefore, US stocks are outpacing government bonds.
Moreover, European sentiment has had a major boost this week thanks to the French election results. Macron’s lead over Le Pen spurred a rally in European equities. The positivity spread globally, becoming the catapult of this week’s equity rally.
Treasury bonds are not so elated. When interest rates and inflation rise, bond prices fall. However, bonds are tipping upwards, indicating that treasuries are unconvinced that an increase in economic growth is imminent.
Treasury valuations suggest that the Trump administration may be unable to bring about meaningful change. The first 100 days of presidency often sets the precedent for the term. So far, Trump has favoured protectionist policies over his pro-business schemes.
Will the president now turn his attention to the motives which helped ignite this equity rally? Or, will his focus remain on immigration and the revival of his rejected healthcare plan?