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Jeremy Owens: Hello and welcome to On Watch by MarketWatch. I’m Jeremy Owens. After the 2024 election, two questions prevailed for us. What will happen to the economy once Donald Trump takes office in January, and where should you be thinking about putting your money in response? We’ll talk about all of that today. Let’s start with the economy that got us here.
Kathryn Anne Edwards: This last four years of the U.S. economy have been something like a fever dream.
Jeremy Owens: That’s economist Kathryn Anne Edwards.
Kathryn Anne Edwards: What we have been through in terms of the number of people laid off, the number of people unemployed, to bounce back, to erase the employment effects of the pandemic, to move right into an inflation spiral that we were able to immediately bring under control. It’ll probably be one of the most studied periods of economic history in the United States.
Jeremy Owens: What Edwards is talking about here is the avalanche of bad economic news that happened pretty much starting at the end of Donald Trump’s last term as president. The pandemic, a bunch of layoffs related to that and then once everybody got back to work, a huge inflation spike that we had not seen in the U.S. for decades.
Kathryn Anne Edwards: This recent fight that we had in our economy with inflation, it lasted about 18 months. It spiked and then it fell again, and we are now back at normal levels. That is not an economic incident that should have snapped the living standards and the economic security of so many Americans. What it revealed was just how long and for how many economic growth had not led to high enough income. One thing that I’ve tried to point out during this bout with inflation is that if you look at wage growth relative to price growth over the past 50 years, for the bottom 50 to 60% of Americans, wages have risen about $3 net of prices. That’s basically the equivalent of they run pace with inflation. So anything whose price rises faster than inflation, that means wages haven’t kept up with for a long time. So things that rise faster than inflation, housing, healthcare, childcare, eldercare, college tuition, I mean, those are some big ticket, very much this is what it means to make it in America, items.
Jeremy Owens: You talk a lot about the decline in American living standard. What do you refer to when you say about it, especially how far back it goes?
Kathryn Anne Edwards: Whenever you judge economic trends, you always need to go to the peak of a business cycle, and so you kind of have to pick the recession that you want to start with. And the 1973 recession ended the era of broadly shared income and wage growth that had followed World War II. So by the time we hit 1973, we are not seeing wages at the bottom grow faster than wages at the top, which they had been doing for years. We don’t see broadly shared income growth. It all kind of comes to a screeching halt. We grow through a pretty terrible economic situation followed by a pretty terrible recession in the early eighties.
Jeremy Owens: And fast forwarding to now, we talked about the fact that inflation is one of the big reasons that Donald Trump won the election. Kathryn, can you talk to me a little bit about Donald Trump’s tax proposals and what they may mean for Americans?
Kathryn Anne Edwards: What I think is very frustrating about it to people who have watched economic policy is that sure, back in the seventies, there was a case to be made that the balance of tax policy had gone too far on the tax side and that we had put some inefficiencies into the system via taxes. We have now spent the past 25 years cutting taxes, and here we have just received a referendum about how horribly people are doing in the economy, almost as if throwing $8 trillion worth of tax cuts over 20 years didn’t solve all the problems in the world.
Jeremy Owens: Now, before the election, DC bureau chief Rob Schroeder and I declared that tax policy would be the most important economic decision the next administration would face. So I brought Rob back on the show and asked him to start with his thoughts on Trump’s tax plans.
Rob Schroeder: Estimate after estimate really does show how expensive the tax cuts could be and how that could impact the long-term fiscal picture and thus consumer borrowing costs too. This is all tied together.
Jeremy Owens: Right. I mean consumer borrowing costs, you bring up the interest rates there. We have had economists tell us that we expect the Fed to slow down their rate of cuts with Trump coming in because of the worries about him increasing the deficit.
Rob Schroeder: Yeah, that’s right. And you saw this in the run-up to the election with the 10-Year Treasury with interest rates climbing. The Fed does set its own rates, but as we know, those are on the very short term. They’re the overnight lending, the federal funds rate. When you look out longer and you have the 10-Year Treasury and longer dated maturities, you see rates particularly on the 10-year climbed, and that is related to what you pay for your mortgage, for example. So as borrowing becomes riskier and investors want to get their money back and so on, they will demand higher rates. So this is a dynamic that we’re going to have to watch very, very closely. The deficit last year for the last fiscal year was rather large and the government’s debt keeps growing quite a bit.
Jeremy Owens: Well, Rob stocks rallied on the anticipation of Trump policies that are presumably favorable to business, tax cuts, deregulation and tariffs. Bond yields shot higher though as investors sold bonds for fear that inflation would rise in the future. In addition, there’s the debt ceiling which the administration is going to need to address pretty immediately,
Rob Schroeder: Right? So the debt ceiling is suspended through the first of the year. Now, what usually happens has been accounting tricks that the Treasury takes, what they call extraordinary measures in DC lingo, and basically that means moving some money around so the borrowing limit is not hit. What we’re talking about here is the Treasury’s ability to borrow. Will there be cuts to spending that are demanded by these kind of elusive fiscal hawks, or will the discussion be, well, we’re cutting taxes and therefore we’re going to have so much growth and the tax cuts will pay for themselves.
Jeremy Owens: In the first Trump administration, he did face resistance within the government. Moderate Republicans along with Democrats tried to stop some of his approaches, and I don’t know if he’s going to face that same level of resistance this time, but we did see echoes of it with Fed Chairman, Jerome Powell saying he would not step down if Donald Trump asked him to, which is probably the biggest moment from the Fed meeting last week.
Rob Schroeder: You hit the nail on the head with Fed Chairman Powell being rather adamant in his most recent press conference. He had a very terse five word answer to whether Trump could remove him. He said…
Jerome Powell: Not permitted under the law.
Speaker 5: Not what?
Jerome Powell: Not permitted under the law.
Rob Schroeder: The history here is that Trump was upset with Powell for raising rates during his term, but it’s interesting now that rates, at least the federal funds rate has been falling. Inflation is cooling, the Fed is cutting rates. But the interesting thing here is that Trump’s policies could be inflationary. There’s a lot of spending, a lot of tax cuts, tariffs and so on. So we could find ourselves back in this situation where inflation takes off once again and Trump calling on the Fed to cut rates once again.
Jeremy Owens: You brought up tariffs there, and that’s one that seems like there’s at least going to be a path for Trump to do that without really having a bunch of resistance put in his way.
Rob Schroeder: That’s right. The president does have authority to put tariffs on imports. A president doesn’t need Congress for this. At the same time, it’s interesting, there’ve been some discussions in Congress about can we write these into the law as a so-called pay for some of the tax cuts. Now granted, this would be a very tall order. There’s been a study that tariffs would have to be as high as 70% to replace income taxes. I don’t think that’s going to happen. That’s a very, very high number, although Trump has talked about 60% tariffs for goods from China, but we have to remember that he was talking about it in a much broader sense.
You have people meanwhile, like Scott Besson, the hedge fund manager who’s been talked about as potential Treasury secretary, talking about these as a kind of negotiating tool. And we know that Trump is very mercurial. He can be changeable. So we’ve got to see what happens with tariffs. I don’t doubt that there will be some level of tariffs, but 60% seems a bit high. You never know. I won’t predict what the percentage would be, but you also have to wonder or ask how quickly, what cadence these will be phased in.
Jeremy Owens: But how quickly he puts those tariffs in is also how quickly we may see infliction picked back up. You brought that up as a problem with these tariffs that if you start adding tariffs, then we’re going to see prices rise again. And in talking about the economic effects of his policies, I think the biggest one we have to get to is his plans for massive deportations. This could have serious economic effects, and blue states are already lining up to combat him on this. These are the type of things we’re going to be watching out for. How does he approach this and how do we think this is going to play out?
Rob Schroeder: Well, let’s start with some numbers. He’s promised to deport 20 million immigrants, which is a staggering number, but let’s think about how this might work. That would be expensive. It would cost billions of dollars. And what’s more, it would be up to Congress to fund. And another factor here is that there would be court challenges to the legality of these things. So you could be held up in court for many months. I don’t know how long it would take, but this is not an issue that will go quickly or quietly. So yes, it’s a wildly ambitious program that he has in place. He is moving on it, but once again, I wouldn’t expect it to go lightning fast, particularly with the kinds of numbers that he’s talking about.
Jeremy Owens: Yeah, I can agree with that, Rob, but obviously we’ll have to see what happens as this transition takes place. Thanks so much for joining us today, we’ll talk to you again as this train keeps moving and Trump gets closer to the White House.
Rob Schroeder: Thank you.
Jeremy Owens: Here’s the takeaway. The big money was moving toward the stock market and away from the bond market after the election, especially long-term bonds. After the break, we’ll talk about why the big money is moving like that and what you can do about it.
Welcome back. So many parts of the market rallied after Trump’s victory. That didn’t really surprise me, but I did want to dig beneath the surface a bit. Why did this happen? Which sectors were impacted the most and how long will this rally last? It was a lot to get into, so I asked Joe Adinolfi, one of our markets reporters here at MarketWatch to join me.
Joseph Adinolfi: Well, I think right now, Jeremy, we’re seeing all the classic Trump trades really firing on all cylinders, two best performing sectors in the S&P 500 on the day after the election. They were financials and energy stocks. Those are pretty closely associated with Trump’s policy agenda. Also, small caps have been having quite a run. It’s believed that Trump’s focus on tariffs would benefit more domestically focused companies, and that’s where small caps come into the picture. Trump really came out hard in favor of crypto during the campaign, and as a result, Bitcoin has rallied to a record high, and a lot of those stocks like MicroStrategy and Coinbase are rallying pretty hard. I think in a reflection of Bitcoin’s advance, Republicans have really kind of pivoted to being the pro crypto party it seems, and Bitcoin prices are really reflecting that.
Jeremy Owens: Yeah, and we’ve seen sectors, like you said, financials do really well, but in this case, we also have some concerns about where the stock market is headed from here. A lot of this goes back to a Goldman Sachs note you’ve written a lot about from a few weeks ago that suggested we could be heading for a period of slow growth for the S&P 500. Could you walk us through what that theory said and how solid it seems to be?
Joseph Adinolfi: It’s basically centered on the idea that right now you have an S&P 500 that based on a number of different valuation metrics is as richly valued as it has been, at least since the dot-com bubble, potentially even since before then, depending on which metric you look at. In the report, the bank’s chief US equity strategist makes the case that valuations and extreme concentration within the S&P 500 have kind of made the index a little bit too expensive. I think the Goldman note got a lot of attention, and also we have kind of this unprecedented level of concentration within the index.
The top three stocks right now are worth more than 20% of the index, and that’s kind of raised a lot of concerns just about the rapid pace of appreciation that we’ve seen just over the last two years, how much longer that can continue. At a certain point, the fundamentals just won’t really continue to justify that pace of appreciation. So Goldman’s Chief U.S. Equity Strategist published the results of their model, which showed the S&P 500 would only appreciate by about three percentage points a year over the next decade, which of course, if that were to happen, it’d be one of the worst stretches for stock market returns of the last century.
Jeremy Owens: We’ve been averaging more than 10% growth a year for a little while now. Tell me more about how these stocks have performed in the last decade.
Joseph Adinolfi: Oh, yeah, over the last 10 years, I mean even with 2022, I think we’re averaging something like 13% according to Goldman’s number that I saw on that report. Since the financial crisis stocks have really performed better than the historical averages would suggest. That kind of comes on the tail of the most recent lost decade for stocks that period between 2000 and 2009, 2010, between the dot-com crash and the financial crisis, you really had a 10-Year stretch there where large cap stocks really didn’t go anywhere.
Jeremy Owens: And my concern is that Big Tech has really expanded profit margins in the past couple of years with the layoffs, with the effects of AI. Can they continue to grow at that rate and continue to drive this market? And it sounds like there are large scale doubts about that ability to continue.
Joseph Adinolfi: Yeah, well, I think one of the issues that Goldman raises in their report, just the notion that investors tend to underestimate once you’ve achieved a certain scale and a certain lofty kind of profit margin, just how difficult it is to continue growing at the pace that Wall Street is really looking for. And also if you’re a business like an Nvidia or like an Apple or like a Microsoft that have these really secure moats, just how history shows that companies in that position, they tend to reign for only a short period, maybe a few decades at the most.
And that’s kind of another issue that Goldman raises in their note. I think the big question right now is what’s going to happen with these kind of Big Tech AI stocks. In one prominent Wall Street analyst who shared some research that was written up by one of my colleagues earlier, he made the case that a lot of these stocks could continue to outperform even under a Trump presidency. Of course, there’s this view that Trump would sort of drop some of the antitrust suits against Google and some of these other mega cap tech companies.
Jeremy Owens: Which is strange because they really started in his presidency, the big antitrust push against Big Tech.
Joseph Adinolfi: Right, right. Yeah, it’s just kind of a sign of the times I think it seems like a lot of the Silicon Valley has kind of learned to maybe play both sides of the political aisle a little bit more astutely just over the past few years. So I think that’s the big question. Will we see Big Tech kind of continue to lead the way? Of course, that trade has kind of wobbled a little bit over the past few months, but it’s still going strong year to date. People have been waiting for kind of a sustained rally in small caps for years now, and we’ve had a few of these kind of false starts like we saw in July and late last year. So will we see these kind of smaller stocks really take the lead here or at least keep pace with some of their large cap peers for a more sustained stretch of time?
That’s something I’ll be keeping an eye on. And then of course at the single stock level, some of the Trump trades, DJT, GEO Group, that private prison company, how much further can these stocks really run up now that he actually has one? And I think that was an outcome that a lot of traders were sort of front running. So what we see a bit of a sell the news reaction and some of those stocks, and then finally Bitcoin. I think that’s been really just staggering. If you look back to where we were in the fall of 2022 right after FTX collapsed, I mean it’s really staged a pretty staggering turnaround and definitely has done so much more quickly than I would’ve expected.
Jeremy Owens: But there’s a lot more cryptos out there that Bitcoin Halo has not exactly extended beyond Bitcoin too much. Ether has done well, but some of these other cryptos could see some action and let’s say Goldman’s right and we get to some lower returns here in the stock market in the next few years. Obviously the big money looking for bigger return is going to be looking for other areas to put that money into besides the stock market, where should individual investors looking to change their portfolio be looking for alternative assets?
Joseph Adinolfi: Well, I think probably one of the most obvious places to move money out of the stock market would be putting it into the bond market over the past few years. Bonds on a total return basis have really dramatically underperformed, but that has left us with yields that are, I think, fairly attractive historically. I mean, yields right now are basically at their highest level since earlier this year. And just really, if you look at it from a broader perspective, we haven’t really seen yields like this since before the financial crisis. So for a lot of investors, it’s pretty compelling to lock in a risk-free return north of 4%, right?
Jeremy Owens: And even bringing it back to where we started with this with Trump, as soon as Trump won, we saw yields on long-term government debt really pop higher, and that’s concerns about the debt load we might face with a president who seems to want to cut taxes and increase spending at the same time. And if you’ve got a long time horizon, especially those long-dated bonds are looking really attractive right now.
Joseph Adinolfi: Buying long bonds has been a bit of a difficult trade just these past few years because it seems like any rise in yields of course is offset by a decline in price. And there are a number of people on Wall Street who think yields are probably going to head a little bit higher here before they peak. But that being said, I think just generally yields are looking pretty attractive compared to stocks right now. And probably a good time, especially if you don’t have a large allocation in your portfolio to bonds. Investors who are a little bit worried about how expensive the S&P 500 is right now could certainly consider diversifying into the Russell 2000 or a fund that interacts that, or an actively managed small cap fund that can help you sort of filter out some of the weaker hands.
Jeremy Owens: I felt like Goldman was kind of going there too. Their suggestions were to look for an equal weighted S&P 500 index fund to get rid of that concentration a little bit.
Joseph Adinolfi: Right. Yeah. Goldman and others on Wall Street have made the case that the equal weighted version of the S&P 500 could outperform the sort of traditional capitalization weighted version of the index in the decade ahead. I think Big Tech has kind of struggled a little bit over the last few months. So yeah, definitely scope to see that rotation sort of continue. And depending on how long your investment horizon is. You could even maybe go looking abroad, emerging markets, other developed markets like Europe. Valuations are lower because I think the prospects for their earnings and sales growth aren’t quite as strong as their peers in the U.S., but given a long enough time horizon, there’s always a chance that that could change and you could end up scooping up some pretty solid bargains.
Jeremy Owens: Joe, thank you so much for passing along what you’ve learned today, and we’ll have you back on in the future.
Joseph Adinolfi: Thanks, Jeremy.
Jeremy Owens: After these conversations, I have three things I’ll be watching intently as Donald Trump builds and eventually installs his government, inflation, tax policy and the bond market, and I see them in that order for a reason. While the Federal Reserve has moved from a focus on inflation to the labor market in the past year, it’s readily apparent that the inflation shock is what helped Donald Trump win the White House, and another round of high inflation is a real possibility if he’s able to follow through with his proposed agenda. On that note, we did receive the latest reading on the Consumer Price Index or CPI on Wednesday, and it showed the first increase in the yearly rate of inflation in seven months, and at least about half of the monthly gains were in housing costs. We’ll be watching this much closer as we move forward.
And that’s it for this episode. Thanks to Katherine Anne Edwards, Rob Schroeder, and Joe Adinolfi for joining us. To keep following the latest on the election and the economy, head to marketwatch.com. If you have questions about the news and the economy, we want to hear them. You can reach us at On Watch at marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review. It really helps others discover the show. The show is hosted by me, Jeremy Owens, and produced by Alexis Moore. Isaac Gaines makes this episode. Melissa Haggerty is the executive producer. We’ll be back next week with a new episode, and until then we’ll be watching.
