Eric Balchunas, ETF Analyst for Bloomberg Intelligence, stated that, "Financial ETFs are on fire, but the center of the heat is really banks, which will benefit from rising rates more than other areas of the financial sector."
Is the strengthening of the dollar merely temporary? Is this recovery an illusion, which will precede an inevitable crash? I have maintained all along that there has been no real recovery and that the FED will not raise interest rates soon, contrary to common widespread beliefs.
The strong U.S. dollar seems to put extreme stress on China and other emerging market currencies. In the past, this has led to liquidity shortages, which have eventually bled into the U.S. stock market, and the People’s Bank of China does not appear to be finished with the latest round of yuan devaluation.
John Engler, President of the Business RoundTable said, “We see tremendous opportunity for economic growth, trade and immigration. I see a silver lining.” “The Republicans understand,” he said, “that they’re on the spot to produce results.”
The new Trump Administration favors the other side of Keynesianism, which tends to favor fiscal expansions driven by tax cuts. The Obama Administration favored increased government spending through Quantitative Easing. Foreign and domestic investors will continue to buy U.S. government paper, as it is still regarded as a safe haven in an unstable world. This fiscal expansion is going to move towards the normalization of short-term interest rates in government bond yields.
The US citizens desire this shift, as they have suffered from the long period of extremely low interest income. The country would benefit from the stimulatory effects of the fiscal expansion. The expansive monetary policy should have reached the end of the road in the Eurozone. Fiscal expansion in Germany would be a significant step to returning to the norm. The US is about to rebalance fiscal and monetary policy, as the Eurozone continues its current madness towards more quantitative easing and NIRP.
The main category looks for those that gained favor as money flowed from sectors that were previously favored to those expected to perform better in the new, post-election environment. Previously, the leaders were defensive growth stocks that became expensive based on price-to-earnings ratios. Now, the advantage goes to cyclical stocks and sectors, financials and industrials that are less expensive but should be able to increase earnings if GDP growth improves. However, large capitalization multinationals will most likely find tough going against rising interest rates and a higher dollar. Accordingly, the advantage should be with smaller domestic companies.
Based upon the first few days, it looks as though the election will become a market game changer.
With stock market bullishness at extreme levels and the gold perma-bears out in force, a sharp rally in gold will certainly catch almost everyone by surprise. So, could a rally be coming in the days ahead? Perhaps you should just keep your eyes focused upon the yuan, as it may once again be foreshadowing what is yet to come!
The combination of expectations for an interest rate hike by the FED next month, along with the potential of higher inflation upon implementation of new fiscal policies, imply rising interest rates and a stronger dollar. There are several ways to position oneself for future rising interest rates and future declining bond prices.
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