Nov 19, 2024, 1:09 PM ETInterview

Post-election market outlook

US equities, the dollar, and bond yields have all risen significantly since early October, driven by a converged narrative of upgraded US growth prospects and post-election policy expectations.
The market has interpreted the Republican sweep as a signal for pro-growth policies, leading to US equity outperformance and widened rate spreads against Europe.
Unlike the sharp steepening of the yield curve anticipated by many investors, the immediate reaction has been a moderate, broad upward pressure across both front and back ends of the curve.
Dominic Wilson characterizes the current yield curve move as a "conventional growth repricing" rather than a purely fiscal trade, though the market continues to price in a stronger US growth profile relative to the rest of the world.
Josh Schifrin notes the S&P 500 is up approximately 25% for the year, with equity markets now beginning to scrutinize specific policy details, personnel appointments, and tariff implications.
Dominic Wilson identifies two primary forward-looking themes: a continued upside in US growth forecasts that remains above market consensus, and a distribution of risks where tariff agendas could further strengthen the dollar.
The consensus outlook for the remainder of the year suggests stocks and the US dollar will likely remain stronger, despite an expected transition into a choppier trading environment as policy details are finalized.

Josh Schifrin's baseline forecast is a 25 basis point rate cut in December, followed by a potential pause in January.
The Fed is expected to raise its "longer-run" dot plot estimate and adjust 2025 projections, signaling a shift toward a more cautious, data-dependent cutting cycle.
Schifrin estimates the Fed dot plot for 2025 may show a reduction of 50 basis points (down from a previous 100 basis point expectation), though he warns that dispersion around this number will be high.
The Federal Reserve is moving into a "destination mode" of slower communication and implementation, particularly regarding the balance sheet and fund rate adjustments.
Schifrin predicts the federal funds rate midpoint will settle at 4.375% after the December cut, placing policy in a less restrictive posture if the economy remains strong.
Bond market volatility is expected to persist, driven by sensitivities to potential deficit expansion and the unusual market dynamic where the spot funds rate exceeds broad treasury yields.
Dominic Wilson and Josh Schifrin both express skepticism that the next administration will pursue a broadly inflationary policy set, citing low energy prices and high public sensitivity to inflation.
Dominic Wilson warns of "tail risks" regarding the US growth story, specifically that the market has priced in a lot of positive growth news, leaving portfolios vulnerable to any disappointment.

Europe: Investors are hedging against a downside tail involving faster rate cuts, weaker growth, and potential tariff impacts, viewing European equities as a protective rather than growth asset.
China: The market is balancing tariff risks against stimulus efforts; while the base case is cautious, there is an "upside tail" scenario where fiscal response proves larger than expected and trade policy impacts are smaller.
Emerging Markets: Dominic Wilson notes that 2017 (the first year of the previous Trump administration) was a strong year for EM assets and suggests a similar upside potential if fiscal shifts are not overly expansive.
Japan: The market is expected to benefit from US growth upgrades, with a specific focus on the 5-year yield curve; Schifrin and Wilson see the front-end of the curve as attractive and likely to climb to higher levels than currently priced.
Dominic Wilson highlights a lack of European corporate competitiveness, citing Mario Draghi's recent report that Europe has not produced a single company with a €100 billion market cap in 50 years, whereas the US has produced six.
The consensus view is that the US is the "best game in town," resulting in a disproportionate concentration of capital in US and UK assets compared to historical norms.

Recommended portfolio positioning involves being long equities and long the dollar, potentially paired with short rate exposure to hedge against potential fiscal-driven yield spikes.
Dominic Wilson identifies three primary risks to the current bullish thesis: valuation concerns due to the extent of the run-up, the potential for a broader-than-expected tariff agenda, and structural rate risks if strong growth necessitates higher yields.
Josh Schifrin is less concerned about common macro risks like trade policy or geopolitics, instead looking for "micro" risks such as a potential slowdown in the AI-driven market rally.
The market's "wall of worry" is shifting toward questions about whether the current optimism regarding growth and policy is fully priced in or if vulnerabilities are accumulating.
Both strategists agree that while the macro backdrop is friendly, the path forward will be volatile as the market navigates the sequencing of policy announcements and their economic impacts.

Market Surprise (Josh): The "windy" path of Fed policy, which swung from an expectation of 150bps of cuts to potential hikes, and finally to 50-75bps of cuts, contrasted sharply with a relatively smooth equity market performance.
Market Surprise (Dominic): The extreme volatility in August, specifically the sharp drop of the Nikkei index to 65,000 followed by a rebound below 15,000, highlighted both underlying fragility and market resilience.
Non-Market Surprise (Josh): The rapid maturation of his children, particularly his oldest turning 13, which has changed his own habits (e.g., becoming a daily Starbucks customer) and his understanding of technology and sports.
Non-Market Surprise (Dominic): His seven-year-old daughter's sudden enthusiasm for working in the office, contrasting with her previous disinterest, and her fascination with office dynamics like "who is in charge."
Market Surprise (Josh): The historic returns of Nvidia, which grew from a $1.5T market cap in 2019 to $3.6T by year-end through a series of massive annual percentage gains, despite a downturn in 2022.
Non-Market Surprise (Josh): The documentary on David Chase and The Sopranos, specifically the revelation of the show's original, ambiguous ending, which mirrored the final scene of the series.