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The stock market is hovering at record highs after getting a boost from Donald Trump’s election victory.
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Meanwhile, bonds have seen a sharp sell-off since the election.
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To spot signs of trade fatigue on Trump’s part, investors should watch the 10-year Treasury yield, JPMorgan says.
As market excitement surrounding Donald Trump’s presidential election victory drove stocks and cryptocurrencies to record highs, JPMorgan says investors looking for signs of upside fatigue should keep an eye on the Treasury market. .
In new research, the firm’s equity strategy team said the 5% level in the 10-year Treasury yield could be a turning point for U.S. stocks. It is currently trading at around 4.3%.
“We believe that around 5% the impact of bond yields on equity valuations begins to shift from a positive/reflationary impact to growing concerns about the sustainability of the bull cycle and the increasing risk of crashes,” the analyst wrote. team on Monday, led by the company’s head of global equity strategy, Mislav Matejka.
Government bond yields soared following Trump’s victory on expectations that the president-elect’s protectionist trade and immigration policies would boost inflation and force the Federal Reserve to raise rates. The 10-year bond rose as much as 21 basis points to 4.47% on Wednesday, the day after the election.
Adding to the upward pressure on bond yields is the prospect that “bond vigilantes” may express their discontent with a growing federal deficit by selling Treasury bonds.
“If the Trump administration pursues overly stimulative fiscal policy, with lots of spending and tax cuts, leading to even larger deficits, I think that may cause bond vigilantes to push yields to levels that create problems for the economy.” “Ed Yardeni, president of Yardeni Research, told DealBook in a newsletter published Saturday.
In the absence of a move above 5% in the 10-year Treasury, JPMorgan said the near- and medium-term direction of the market would be dictated by which policies Trump prioritized.
JPMorgan said it would see stocks struggle if the president-elect’s second term began with immigration restrictions and higher tariffs. Meanwhile, Trump focusing on tax cuts would be a positive outcome for the stock, the company said.
Read the original article on Business Insider