Remarkable. That’s the best way to characterize the speed with which the stock markets went from fear to faith in less than 24 hours following the surprise Trump victory. Reflation was all of a sudden the name of the game. Tax cuts and new bridges for all! Good news for equities (the Dow Jones Industrial Average managed to reach a new all-time high), but bad news for bonds. Tax cuts and new bridges stimulate the economy (=more inflation) and cost a lot of money (=more debt), which explains why bonds bore the brunt of it.
To us this sounds like a pretty one-sided interpretation of what may be in store. Sure, Trump has mentioned taxes and infrastructure, but what about bringing back jobs from China, canceling the Nafta trade agreement, and deporting millions of undocumented foreigners? These kinds of measures are certainly not going to boost domestic demand, and could come as a shock to a financial system that was not looking very strong to start with. The Great Depression was so great because of the trade wars that took place during that period.
Timing is everything. Although we see an increase in risks and uncertainty, the market has opted to go for the positives. Markets can be irrational longer than we would like to see, which is why we currently have a tight stop-loss in our short position in equities, but we remain underweight government bonds.
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