Wall Street roared back from the abyss on Wednesday in the wake of Donald Trump’s surprise electoral victory over Democrat Hillary Clinton. Overnight, equity futures had dropped several percent, echoing the Brexit chaos from June: An angry electorate out to punish the establishment was making markets recoil once again.
Yet the fear soon subsided. Trump’s victory speech was conciliatory, Clinton conceded. And, most important for reversing the panic that set in on first blush, traders realized that if Trump’s economic plans are enacted, they would amount to a huge fiscal stimulus of tax cuts and infrastructure spending, with a strong dose of deregulation for the financial industry and others.
Equities soared, with the Dow Jones industrials index gaining 1.4 percent after testing new highs, thanks to big gains in bank stocks and other areas set to benefit from a Trump administration. The dollar surged. But a big sell-off in Treasury bonds, evidence of technical weakness, and a jump in long-term interest rates suggest challenges -- and ongoing market volatility -- lie ahead.
Treasury bonds were slammed on a spike in inflation expectations and chatter of official selling of U.S. bonds by the Chinese. Also, the December Federal Reserve interest rate hike seems to be on track as well. But that boosted financial stocks in a big way, up 4.1 percent as a group, on hopes that higher rates will lift loan profitability.
Some health-care stocks were also strong on visions of a lighter regulatory burden on drugmakers and biotechs. The group gained 3.4 percent, with Pfizer (PFE) closing up 7.1 percent after trading even higher earlier in the session.
U.S. Steel (X) gained 17.2 percent, thanks to an analyst upgrade by Jefferies on post-election benefits from possible trade protectionism and increased infrastructure spending. Corrections Corp. of America (CXW) gained a whopping 43.1 percent as analysts noted possible higher demand if Trump tightens immigration enforcement. Clinton’s defeat also removed the threat of her anti-private-prison stance.
And Lockheed Martin (LMT) gained 6 percent on a general boost for defense stocks, thanks to Trump’s clamoring for an upgrade to military hardware.
On the downside, emerging markets stocks, real estate investment trusts (REITs) and other yield-sensitive issues, and clean energy stocks underperformed.
Looking ahead, a lot remains in flux.
Will the surge in long-term interest rates continue to be a net positive despite the dampening effect it will have on already tepid economic growth?
Will Fed Chair Janet Yellen come under political pressure to resign?
Will recent job gains continue?
And will the surge in the dollar further pinch U.S. corporate profit margins and weigh on crude oil at a time of vulnerability for both?
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