Despite ongoing policy shifts from Donald Trump, investors are showing optimism, largely due to anticipated tax cuts and the perception of strong market support from the US President. While tariffs remain elevated, markets seem to have absorbed their impact. The anticipation of tax cuts next year is expected to provide a significant fiscal stimulus, further bolstering investor confidence. Last week’s interest rate cut by the US Federal Reserve, despite Trump’s persistent pressure on Chairman Jerome Powell, has also contributed to this sentiment.
Bank of America strategist Michael Hartnett describes the situation as a “run it hot” approach, suggesting an implicit guarantee that the economy and stocks are too big to fail. This perspective appears to resonate with investors, as evidenced by substantial inflows into global and US stocks last week, marking the largest since December of last year. According to Bank of America’s research, $US68.4 billion flowed into global stocks and $US57.7 billion went into US stocks.
This strategy carries inherent risks, particularly the potential for creating an asset bubble. Hartnett acknowledges this danger but advises investors to consider undervalued sectors such as small caps and rate-sensitive areas like real estate investment trusts and biotech. He also places the current market within a historical context of equity bubbles, noting that while gains have been significant, there may still be room for further expansion. Since the lows of March 2023, stocks are up 223 per cent.
The potential for higher spending leading to increased inflation remains a concern. With US household wealth having risen significantly this year, there’s ample capacity for spending, potentially triggering a second wave of inflation. The White House may then resort to pressuring sectors like pharmaceuticals and utilities to control prices, which could add another layer of complexity to the economic landscape.
