The U.S. stock market soared on Wednesday as investors reacted to Donald Trump’s victory in the presidential election. The Dow Jones Industrial Average surged 1,500 points, marking its best day in nearly two years. The S&P 500 rallied 2.5%, and the Nasdaq composite jumped 3%, pushing all three indexes to new records.
However, the bond market experienced a significant decline. The yield on 10-year Treasury bonds reached a four-month high at 4.479%, indicating investor unease over Trump’s proposed fiscal policies. Economists have warned that his plans to maintain low taxes and impose tariffs on imported goods could lead to a wider federal budget deficit and potential inflation.
Jonathan Lee, senior portfolio manager at U.S. Bank, noted that bond investors might see more risk in holding U.S. debt without a clear plan to reduce federal spending. The 10-year Treasury bond serves as a benchmark in the bond market, and its yield began to climb weeks before the election as investors anticipated a Trump win. Investors are concerned that high deficit spending will continue under Trump’s administration.
Many forecasters expect that Trump and a Republican-led Congress will renew the 2017 Tax Cuts and Jobs Act, which previously increased the federal deficit. The Biden administration’s spending on COVID relief also added to the national debt, and bond traders now anticipate further deficit growth under Trump.
Stocks soar amid election uncertainty
“We’re living beyond our means in the United States, and we have been for a very long time,” said Todd Jablonski, global head of multi-asset investing for Principal Asset Management. As the federal deficit expands, investors demand higher interest rates for lending money to the government due to increased risk. Neither Trump nor Democratic presidential candidate Kamala Harris provided a convincing plan to reduce the deficit during the campaign.
Harris proposed raising taxes on the wealthiest Americans and corporations, while Trump pledged to extend and deepen existing tax cuts, arguing that economic growth would boost revenue. However, the bond market remains skeptical. “If there’s a Republican sweep of the House, Senate, and presidency, I expect the bond market to be wobbly,” said Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, on Election Day.
“I expect them to be worried that Trump would enact all those tax cuts, and I think bond yields would rise.”
As the political landscape continues to evolve, bond investors will keep a close watch on fiscal policies and their implications for the market. The impact of Trump’s second term will also depend on whether Republicans gain control of Congress, which remains uncertain. Despite the uncertainty, financial experts advise investors to stay the course and maintain a long-term perspective.
Slow and steady principles of investing have withstood various political upheavals and economic fluctuations in the past, and they are likely to hold strong now. Reacting hastily to political developments can often do more harm than good to an investment portfolio.
