Overreactions to Trump

There is a consensus forming among investors that is more perception than reality.  The perception of deficit spending with tax cuts being inflationary and adding to growth and thus bad for bonds and good for stocks.  But with the assumption that the Fed will be raising rates regularly in 2017 (that is what the bond market is predicting), that is a negative for growth.  When you raise the cost of mortgages, the cost of corporations to issue bonds, and cause a reverse wealth effect on bond holders, those are all negative for the economy.  Real estate will slow down.  So will debt fueled buybacks.  Sure tax cuts will provide stimulus, but without QE, those dollars are immediately sucked out of the economy from bond buyers.  And there will have to be a lot of money set aside to buy bonds because there are huge projected increases in the budget deficit with these unfunded tax cuts and infrastructure spending.

And the bond market is global.  The jump up in Treasury yields is also pushing up yields globally, providing a monetary drag to the economies globally that will not be getting that tax cut or deficit spending.  I believe the net effect is a negative for global financial asset prices which weigh heavily towards fixed income and real estate.

So if the growth expectations aren't met, as I suspect, that could set up a strong counter move in bonds in 2017.

Another perception is that the dollar will be stronger because of higher interest rates.  A lot of that move already happened in 2014/2015 when the euro and the yen were getting crushed on expectations that the Fed would raise and the ECB and BOJ would cut and do QE.  The euro and yen are undervalued already versus the dollar on a PPP basis.  Also, don't forget the dollar was extremely weak under George W. Bush's reign when he had a similar tax cut plan while the Fed raised rates continuously from 2004 to 2006.

With this weakness in the bond market, the stock market should have a difficult time going higher.  But the money flows to the stock market should keep the downside limited.  The 10 year yield is coming towards some major resistance in the 2.30-2.35% zone, which is the top of the zone in yields last winter.