Post Trump Markets
Donald Trump. President elect. It doesn't matter whether that makes you want to do back flips or go curl up in a corner, sober investors deal in reality. That is the reality
. After decades on Wall Street as a trader, deal maker, real estate investor and market prognosticator, as shocking as it may seem, I have an opinion. As a matter of fact, I have conviction. Allow me to share.
First, let's make sense out of what we see as of today, 8 days post-election. Starting with stocks and bonds (interest rates) this makes PERFECT sense. Maybe for validation or maybe just to say "I told you so", I will point to my personal Facebook page post the night of the election. Here is word for word excerpt: "I have been trading for 30 years. I am telling anyone who cares, you can buy stocks with both hands tomorrow
with when they open -900..." Understand that stock futures were trading down 800 at the time of the post (9:53 pm
). In the comments section I also predicted the market would see new highs. Feel free to friend me and read the whole post for yourself.
The market of course we now know, reversed and went to new highs. What is curious to some, but certainly not a surprise to me, is the selloff in the bond market. In other words, interest rates have risen somewhat rapidly. While the "sky is falling" crowd is as premature in calling death to the housing market as Time Magazine was by printing their now infamous cover, I will, with conviction, explain why they are dead wrong.
Isn't the fed supposed to raise rates?
The fed has been dying to bring rates off the zero line for years. They have been fearful of creating bubbles and disjointed markets that can have very negative lasting effects. Zero rate environments are dangerous as they encourage too much risk taking and punish savers. Their dilemma was that they could not hike rates back to a normalized level without risking stifling the tepid and fragile economy.
Post Trump, stocks are rallying and interest rates are rising. This phenomenon is rare. However, what this price action is telling us is that the markets now believe the economy can withstand a moderate rise in rates without coming off the tracks. Lower taxes and more spending may make deficit watchers squirm, but as the economy goes, it is a one-two punch that will likely stimulate GDP to a level that will enable the fed will act swiftly.
Rates are going up. Expect a 30 yr. fixed to be in the 4-4.5% range next year. As I love making predictions, I give the odds of a fed hike at the next meeting 100%. I wouldn't even be shocked to see a 1/2 point move. 2017 will see 2 or 3 more, notwithstanding a slowdown in economic growth. It is called normalization and it is a good thing. A strong economy is generally a big positive for stocks and real estate. With the 10 year yield now at 2.20 (vs 1.50 mid-summer), one could expect to pay a bit more for a home mortgage.
That's going to hurt housing right??
WRONG. As banks are finally able to make a decent spread (the reason bank stocks are rallying), coupled with less regulation, more loans will be extended. Guess what that means? More qualified home buyers. While the average monthly payment will clearly rise by a moderate margin, there will be more buyers to bid on the still historically low inventory (although up from last year).
So what if this turns into an inflationary spiral???
First, highly unlikely in the short term anyway. There is far too much slack in the economy to make a strong case for hyper-inflation. The rest of the planet is still battling DEflation. But just for yucks, let's say it happens. What do you want to own when the value of cash declines? Answer, hard assets. So all the gold bugs are getting ready for the party, and not to say they are wrong. Gold would fare well in that scenario. But one must remember, you can't live in a bar of gold. You can't rent a bar of gold and you can't put your new Christmas Tree in one either. The case for housing is strong. While we likely won't repeat the hyper post-low gains of the last few years, I would rather have my money there than just about anywhere.