Volatility, Uncertainty, followed by “Less Uncertainty”

Last night and this morning were a fascinating study in market psychology. First off; the markets had priced in a Clinton victory after Sunday’s “all clear” announcement from the FBI. Treasuries sold off on Monday and Tuesday (Election Day) and equities rallied. Then came the election results and markets began to roil worldwide, Brexit style: huge selloffs in Asian markets, Dow Jones futures were down 800 points, and safe havens such as US Treasuries and gold rallied. Then Trump’s acceptance speech included conciliatory language, toned down rhetoric, calls for unification, and fiscal policy: infrastructure investment, corporate tax reform. This calmed and rallied equity markets. The 10 year Treasury, which dropped to 1.71% on the initial “flight to quality” later sold off and the yield hit 2.06% before settling at 2.02%. Why? (1) Trump is promising infrastructure and military spending while cutting taxes. This will increase deficits and the supply of Treasuries, (2) As volatility lessened, the Fed is more likely to raise rates at the December meeting, (3) Several spots on the Fed’s Open Market Committee are coming up for nomination and Trump is expected to nominate more “hawkish” members. stay tuned.     David R. Pascale, Jr.