As we head into 2017, higher bond yields are undermining bond-sensitive stocks while commodity stocks are doing well. This trend is likely to last into the New Year, especially if doubts build about the Australian economy, says Martin Conlon, Head of Australian Equities.
US stocks have surged to record highs since Donald Trump won the US presidential election. To justify these unprecedented levels, investors are making many assumptions on how the Trump era might manifest itself across politics, economics and ultimately returns. These assumptions include that Trump will prove more moderate in power than on the campaign. Another expectation is that fiscal policy will play a bigger role in driving the US economy, which will lead to faster inflation and higher interest rates. Investors are assuming that Trump will adopt a more protectionist approach to trade but only in token ways so it doesn’t sabotage the US economy. They are confident he will refrain from any taunting of the Federal Reserve that crimps its independence. But these central scenarios appear to be on flimsier footings than many might think. Thus 2017 could prove more turbulent for US stocks than many assume.
Bond yields are rising, especially since the unexpected victory of Donald Trump in the US presidential election. The big question hovering over bond markets now is whether or not the recent drop in bond prices signals the end of the 35-year bond bull market. Or is it just another brief disruption to the long-term bond rally as occurred in 1994? While it’s too early to be definitive, the current move appears more cyclical than structural as most of the longer-term drivers of longer yields remain in place.