Yes, yes, I get it. The market keeps climbing and the calls for a correction grow louder. You see, sometimes markets do not think or react rationally especially in the short-term. Anyway, the “Trump trade” has hit the pause button over the past two days, with the major market averages taking a bit of a breather. The chart do not lie. Leading the cooldown is the Russell 2000 small-cap index, which I have been tracking closely on my radar.
Our model for investors with a bigger appetite for risk includes a healthy helping of small-cap exposure because sometimes, fortune really does favor the bold and those who do not mind a little extra volatility on the side.
Meanwhile, the bond market has decided to keep its cool for now. The 10-year Treasury yield has settled just under 4.5%, which is reassuringly boring. However, the 2-year yield is creeping up, now at 4.3% as investors fret that Trump’s potentially inflationary policies could push the Fed to hold off on finding that elusive neutral rate of interest.
Elsewhere, global investors did a quick pivot on their economic outlook following Donald Trump’s election victory, suddenly seeing brighter skies ahead for global growth and a bit more inflation on the horizon according to Bank of America’s latest monthly fund manager survey.
“Buy America” seems to be the new mantra. Investors have beefed up their allocations to US stocks and small caps, betting that these more domestically focused plays are poised to ride the wave of a stronger US economy. After all, who needs global diversification when you have a “Trump bump”?
Inflation expectations got a glow-up too. Post-election, a net 10% of respondents foresaw higher inflation over the next year, the highest level since July 2021. Just a month prior, a net 44% of investors were bracing for lower CPI.