A Trump Tantrum?

The pre-election views that a Trump victory would mean a market route proved way off the mark. Instead, as of early December, the stock market and bond yields have jumped and credit spreads have tightened. The market moves, according to a popular storyline, reflect bets on a rosy Trump scenario in which Trumpist policies—whatever their long-term implications—result in significant short-term stimulus to the economy.

We offer the following cautionary note about the market moves: stock prices, bond yields, and credit spreads have, since the election, moved in the same direction as they did in the taper tantrum in 2013—but they have moved about half as much. We might just as well call this the Tiny Trump Tantrum.

Table 1 repeats data from our earlier post and adds the analogous moves since the election. The stock market in the recent event is up about 8 percent vs. 16 percent in the tantrum; 10-year yields up about 69 basis points vs. 138; the Baa credit spread down 27 basis points vs. 48. In short, we’ve had almost precisely half a tantrum. Of course, not all indicators show this simple proportionality: in the taper tantrum, forward long-term real yields jumped almost 200 basis points, perhaps signaling persistently higher real returns; since the election, the market has been much less enthusiastic, rising only 32 basis points.

2013 2016
Yield (%) 5/2 12/31 Change 11/4 12/19 Change
10-year Treas. 1.66 3.04 1.38 1.78 2.47 0.69
Baa spread 2.81 2.33 -0.48 2.68 2.41 -0.27
5×5 TIPS 0.04 1.95 1.91 -0.34 -0.02 0.32
S&P500 15.7 8.4

Table 1. Yields on four dates. 10-year Treas. is the Treasury 10-year constant maturity yield; Baa spread is Moody’s Baa index minus 10-year Treas.; 5×5 Tips is the 5-year forward 5-year TIPS (real) yield; S&P500 is the percent change in the S&P500 between the dates for the two columns to the left. Sources: FRED except for 5×5 Tips, which is from Bloomberg.

Market moves in 2013 were labelled a tantrum, and the same moves now are being interpreted by some as a vote of confidence. The act of reading macroeconomic implications directly from financial market data is often practiced with the sort of seriousness that NASA engineers bring to aiming spacecraft at heavenly bodies. Sadly for the earnest story tellers, anyone who bothers to check finds that even seemingly emphatic moves in financial markets are regularly followed by macro dynamics that bear no resemblance to popular stories. For example, nothing much (good or bad) on the macro front followed those emphatic market moves in 2013.

It is for this reason that we’ve been reminding folks that the FOMC almost never makes a fundamental change to the stance of policy based mainly on interpretations of market moves. Instead, policymakers tend to wait for confirmation or rejection of market signals in macro data.