Weekly Risk Signals

The market’s initial positive reaction to the Trump election victory seems to have faded. We’re still seeing some of the more direct Trump trades, such as financials and energy, doing well, but the initial fervor seems to be giving way to concern over the potential impact of Trump’s policies. It’s a good sign that bond market volatility has waned a bit. Japan is still a big potential risk.

It’s clear that investors are in a jubilant mood. The volatility in the bond market, however, still gives me pause. Long-term yields are all over the place. The election, the Fed rate cut, shrinking liquidity, inflation concerns and rising debt loads are combining to create an environment where I think the true price of Treasuries is still being discovered. I’m encouraged by the potential in small-caps here.

It’s as consensus as we’ve seen these signals in a while, but we could be in for a week of volatility. It’s possible that the presidential election this week could take multiple days before we’re able to declare a winner and that could send both stocks & bonds whipsawing around. The markets may choose to “sell the news”. The behavior of the bond market, however, is concerning. Volatility has picked up meaningfully.