Market Steady After Election but Inflation Worries Remain Amid Policy Uncertainty | November 8, 2024

Call it the Trump pump or maybe just the relief from a smooth election outcome. No drawn-out drama — that was the big thing going into this week. It wrapped up fast and clean. That’s probably what the country needed to bring some sense of togetherness.

For the market, the message was clear: the trend kept rolling without any disruption. But now that valuations are near record highs — just shy of the dot-com bubble and the COVID craze — we need real economic plans soon to keep this momentum. There are gaps that need answers.

The general risk situation looks steady for now, but bonds are showing signs of stress. The yield curve, which tracks how short-term and long-term interest rates compare, is getting tighter, and that needs to get worked out. It was good to hear that Trump’s team doesn’t plan to push Powell out, and Powell seems ready to stand his ground at the Fed. Still, some tension is brewing, and hopefully, it doesn’t get ugly.

The economy looks solid overall. Sure, unemployment claims ticked up a bit this week, but it hasn’t been a major decline, and confidence is still strong. This positive energy feeds off itself and got a little more fuel this week. But that yield curve tightening between the 2-year and 10-year rates is a sign that inflation concerns are creeping back. Sentiment builds on itself, and we already had a ton of momentum for the bulls. This week just took away a major worry.

The real question is what policy impact we’re going to see. There’s a lot of unknowns around how Trump’s potential second term could shape the economy. His first term was all about tax cuts, deregulation, and trade tariffs. But what really left a mark was the COVID Rescue Plan — those checks signed by Trump’s name — that pushed debt way up and contributed to the inflation spike. Even though the Biden administration added to the spending later, most of the inflation blame ties back to the earlier rescue money.

So if people are hoping the economy will keep improving without another wave of stimulus checks, what’s the strategy? So far, we’ve only heard about tax cuts and tariffs, but we need to see if those will be enough. Inflation is still lurking, and if policy isn’t spot-on, it could flare up again.

That brings us back to the yield curve, which has been in a bear steepening pattern for the last six months. That’s been a signal of America’s economy holding strong. But next week’s inflation numbers will be a big deal. Even though inflation has cooled off from its peak, prices are still really high. And here’s the ironic twist: the guy who just got reelected is the same one many think triggered the inflation problem with his early pandemic stimulus. It made sense at the time, but now there are big questions about what the plan is to keep inflation under control. The market is starting to get a little uneasy about that.