If the US were to adopt the latter, both real and financial assets would benefit. Corporate yields would compress over Treasuries as earnings outlooks improve and an accommodative central bank keeps a lid on volatility. Under this scenario it is hard to imagine even longer-term inflation levels remaining pinned down under secular stagnation and deteriorating demographic clouds.
Looking beyond inauguration day on January 20 2017, the biggest risk for markets over the next four years will be the execution of Trumponomics.
President Obama’s two terms have seen a shift from an economy on the brink of destruction to one that was, until now, viewed as fully recovered and approaching the maturity phase of its cycle. The past eight years have seen a US economy growing at an anaemic real rate of 1.3 per cent, and still only 2 per cent if you strip out 2009.
Bond markets are forward looking and usually more accurate than human forecasts, so it can only be hoped that this recent rerating of interest rates is a vote of confidence by the markets for Trumponomics.
Rob Lee is executive director at Signia Wealth
