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Bull Market Surges on Trump Enthusiasm as Investors Flock to Small Caps, Banks, and Tesla

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In the wake of Donald Trump’s recent electoral victory, optimism has swept through the stock market, fueling a strong surge in risk-driven assets. Investors, buoyed by expectations of market-friendly policies, have eagerly turned to small-cap stocks, financials, and even Tesla, driving a new wave of momentum in the market.

A Boost for Risk Markets

Trump’s clear electoral outcome, combined with the likelihood of a Republican-controlled Congress, eased fears of political gridlock. This outcome has energized risk markets, reminiscent of the “Trump Trade” in 2016, when cyclical, small-cap, and financial stocks saw significant gains. The S&P 500, up 4.7% for the week, briefly crossed the 6000 mark on Friday, benefiting from a three-week rally and support from the Federal Reserve, which trimmed interest rates by a quarter-point.

Despite an uptick in Treasury yields and a strengthening dollar, these factors haven’t dampened investor enthusiasm. The 10-year Treasury yield briefly reached 4.4% on Wednesday, but this level hasn’t historically hindered economic growth. Investors appear to have plenty of positive news to justify their bullish outlook, though there are notable differences from the market conditions surrounding Trump’s initial election in 2016.

Market Differences from 2016

Several factors distinguish today’s market from 2016. Core inflation, now at 3.3%, is notably higher than the 2% rate seen during Trump’s first term, and the federal deficit has risen to over 6% of GDP. Additionally, valuations have escalated since 2016, with the S&P 500’s price-to-earnings (P/E) ratio now above 22, up from 17 at the time of Trump’s previous victory.

In 2016, the economy needed the tax cuts and deregulatory measures associated with Trump’s policies to spur growth. Today, with an economy already expanding and inflation above target, additional stimulus could potentially amplify already existing trends. Nevertheless, many investors are optimistic that regulatory easing and potential corporate tax cuts could bolster earnings growth into next year.

Sector Performance and High Sentiment Levels

As in 2016, small-cap stocks and value sectors have gained ground, with investors heavily invested in the Russell 2000. Financials, which have outpaced the tech sector since August, are drawing institutional attention, and Citi equity strategist Scott Chronert has noted a rise in growth projections, now priced at 13.6% for the next five years. However, Chronert cautions that this rally may be approaching limits, as much of the growth is already factored into market valuations, especially as concerns about tariffs and higher interest rates resurface.

Tesla and Financials Soar

Tesla surged 30% this past week, fueled by retail and institutional enthusiasm for potential growth under Trump’s policies. Shares of Goldman Sachs and other financials also rose, driven by expectations of heightened merger and IPO activity, along with regulatory changes favorable to the sector. Although growth projections are high, strong earnings and prolonged economic momentum could support these valuations into next year.

Final Takeaways

While the S&P 500’s recent rally has pushed it above historical levels, analysts suggest a market peak is unlikely in the near term. Still, caution is advised as investor sentiment remains highly positive, potentially approaching overheated levels. Seasonal trends often favor continued gains near year’s end, and with sentiment running high, some volatility may accompany the year-end rally.

 

Mortgage Rates Surge Following Trump Victory, Causing Housing Stocks to Drop

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President-elect Donald Trump’s victory has led to a noticeable increase in U.S. 10-year Treasury yields, which has subsequently impacted mortgage rates. On Wednesday, the average rate for a 30-year fixed mortgage climbed by 9 basis points to 7.13%, according to Mortgage News Daily. This rate marks the highest since July of this year, though the increase was somewhat lower than some market analysts anticipated.

Matthew Graham, COO of Mortgage News Daily, noted that bond traders had expected rates to climb if Trump won, especially in the case of a Republican majority in Congress. While this majority is still uncertain, Trump’s victory alone has already pushed rates higher.

This spike in mortgage rates has adversely affected housing stocks. Major homebuilders such as Lennar, D.R. Horton, and PulteGroup saw their stocks fall by about 5% in midday trading. Retailers associated with home improvement, including Home Depot and Lowe’s, also experienced a decline of around 3% each. John Burns, CEO of John Burns Real Estate Consulting, emphasized that builder stocks are particularly sensitive to mortgage rates, which influence housing demand and construction costs.

Although Trump has not provided specific plans regarding housing policy, he has previously mentioned deregulation and the potential opening of federal land to increase housing supply. In a statement, Carl Harris, chairman of the National Association of Home Builders (NAHB), expressed optimism about Trump’s administration, indicating that the NAHB anticipates working with Trump to advance housing legislation aimed at easing affordability challenges and boosting supply.

Builders have been absorbing some of the mortgage rate increases by offering rate buy-downs to customers, though this approach has reduced profit margins. Despite the Federal Reserve’s recent rate cut, mortgage rates have continued to climb due to strong economic reports in September and October, which drove up bond yields.

For homebuyers, this rate increase translates to a substantial difference in monthly payments. A borrower purchasing a $400,000 home with a 20% down payment on a 30-year fixed mortgage would have had a monthly payment of $1,941 in early September; now, that payment is $2,157, reflecting an increase of $216 per month.

The current housing market has seen an unusual boost in existing home sales, with pending sales (signed contracts) rising by 7% in September compared to August. This sales surge is largely driven by increased inventory, as the number of homes for sale in October was up 29.2% compared to the previous year, reaching the highest levels of active inventory since December 2019.

According to Graham, the future trajectory of mortgage rates will depend on inflation, broader economic performance, and Treasury issuance, factors which will continue to play a critical role in the U.S. housing market.