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November 16, 2016

A New Market Regime After Trump

By Richard Turnill, BlackRock

Reflation has been a key theme shaping global markets in recent months, amid signs of rising price pressures, central banks signaling a greater tolerance to let inflation run hotter and policy emphasis shifting to fiscal stimulus. We see Donald Trump’s win and the Republican majority in Congress amplifying this dynamic in the short term. This week’s chart helps explain why.

Reflationary environments—characterized by stronger nominal economic growth—tend to help boost assets such as commodities and value stocks and hurt many perceived safe havens. See the recent rise in the 10-year U.S. Treasury yield (bond prices and yields move in opposite directions) in the chart above, as well as the underperformance of bond-proxy utilities versus the outperformance of cyclical banks.

Fuel for the reflationary fire

We see the election result increasing the likelihood of income and corporate tax cuts—as well as greater spending on infrastructure in the medium term. These measures could create jobs and support wage growth, further fueling today’s reflationary trend and increasing the fiscal deficit, we believe. This should result in at least a moderately steeper U.S. Treasury yield curve. We expect the Federal Reserve to raise rates next month and see a rising chance of additional future rate hikes.

Against this backdrop we are cautious of long-duration bonds and favor Treasury Inflation Protected Securities (TIPS). We see equities as attractive, but expect lower returns ahead amid rising policy uncertainty. We expect cyclical and value equities (particularly financials and miners) to outperform, health care stocks to benefit under a Trump administration, and the U.S. dollar to strengthen.

There are increased long-term economic and market risks. The Trump shock has magnified political uncertainty linked to rising populist pressures ahead of key votes in Europe. The President-elect has vowed to overturn or renegotiate trade deals. This could hurt the global economy—particularly export-dependent emerging markets (EMs)—and spark risk-off sentiment and a weaker Chinese yuan. These jitters were reflected in rising volatility and a selloff in EM assets after the election. Yet for now we see selected EMs benefiting from improving economies, easing monetary policies and a global focus on fiscal spending. Read more market insights in my Weekly Commentary.

Courtesy of Richard Turnill, BlackRock’s global chief investment strategist.  He is a regular contributor of the BlackRock Blog

Investing involves risks, including possible loss of principal. International investing involves special risks including, but not limited to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2016 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2016 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners. USR-10932

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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