After the Ballot: Market Trends and Federal Moves

Explore the post-election market shifts as Bitcoin hits record highs, bond yields climb, and the Fed adjusts its strategy. Join Andrew Wilkinson and Steve Sosnick for expert insights into the forces driving today’s financial landscape.

Summary – IBKR Podcasts Ep. 206

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this edition of IBKR Podcasts. I wanted to catch up with my colleague Steve Sosnick, IBKR’s Chief Strategist in the midst of the post-election risk-on rally. And just for the sake of posterity, we’re recording this as the S&P 500 index is trading at around 6,000, the Nasdaq Composite is trading around 19,250, and bitcoin’s just put in a high at about $94,500 per coin. Welcome, Steve. How are you? 

Steve Sosnick 

I’m good. I’m not $94,000 a coin good, because that’s pretty exceptional, but otherwise doing fine. Thank you. 

Andrew Wilkinson 

It certainly is now. A lot’s happened since my last conversation with you, and I know that you’ve been extra busy not only on financial television channels, but also at our very own market commentary blog on Traders Insight. So today I wanted to take the opportunity to catch listeners up with what you’ve been writing about post-election, and in response to an acceleration of risk-on trades across the market. Let’s start with government bonds. The Fed cut interest rates for a second time since we last spoke, yet yields are higher. Tell us about the bond vigilantes, Steve. 

Steve Sosnick 

Yeah, the bond vigilantes are an interesting crew. They come and go over time. The short answer is that bond traders should get nervous if we’re looking at a situation where deficits continue to increase, and the debt continues to increase, and nobody seems particularly eager to finance that.  

Over time, and I’ve been at this a long time, I’ve been hearing about the imminent demise of people being willing to pay for us treasuries for years. I don’t go that far. There’s that apocalyptic view which I’m not gonna’ bring out, of “oh, they won’t finance our deficits.” 

That’s going to take a lot. On the other hand, I think it is quite fair to question how much people are willing to pay for those deficits, because it’s pure supply and demand. If the supply keeps going up, in theory, if demand is relatively fixed, the price should go down. 

And in yield terms, yields up. bond prices down. That’s where the notion of the bond vigilantes come from. I think there are reasons for bond investors, and investors overall, to be concerned about fiscal policy and the path thereof. It’s understandable why people might be fearful that tariffs could bring about further inflation. 

Of course, inflation is detrimental to bond prices.  While there’s talk of, improvements on the, on the spending side, those have been a bit more vague. I realized they put Elon Musk and Vivek Ramaswamy on the case.  Neither of them has actually been in government, which could be a plus in terms of taking a fresh look at things, but could be a minus because you don’t necessarily know where all the money’s going. It’s understandable why you see some nervousness in the bond market. 

That had been one of the thoughts. One of the quote-unquote “Trump Trades” was higher bond yields. And it was odd. We shot up immediately after the election. We came back, the yields came back in, it was a good 30-year auction. But now we’re back flirting with those highs again. 

The 10-year is actually a bit higher than where it was.  The 2-year is toward the high end of where it’s been, but not so far. 

Andrew Wilkinson 

So, you referred there to that collective set of investments known as the Trump trade. And I think you recently described Tesla’s (TSLA) share price movement in one of your articles, Steve, since the election as a vertical rather than parabolic move. And again, we saw Bitcoin reaching record highs. Tell us where the Trump trade stands right now in your opinion. 

Steve Sosnick 

I think it’s fading in some regards and it’s, obviously, as we’re taping this you gave the disclaimer about Bitcoin. Bitcoin is clearly just, on a rocket ship ride. Let’s call it a SpaceX ride right now. Tesla seemed to have hit a limit around $350, at least going forward. 

Again, understand why the market is enthusiastic about Tesla. Elon Musk bet big on Trump. And obviously it’s reasonable to expect some sort of payoff. It’s not clear that the payoff necessarily is Tesla related. It’s reasonable to expect that it could be a beneficiary. 

Perhaps most of the benefit goes to SpaceX, which is still a private company. So, there’s a lot of, it’s understandable why there was a big jolt of enthusiasm, but why that one may be a bit more constrained. Bottom line is, Bitcoin is only constrained by what people are willing to pay for it, whereas a stock has metrics, And obviously, yes, it still worth only what people are willing to pay for it, but it’s easier to compare it on a range of fundamentals. 

In terms of other elements of it… we’ve seen oil prices tick down. I don’t know if that’s really specifically because of the “drill, baby drill”, or more because of a lack of enthusiasm about the Chinese stimulus. And certainly, if China is not demanding more commodities, that’s not good on a global basis. We have seen the dollar strengthen. Again, there it’s hard to say if that’s the result of “America First” or higher yields, both of which would contribute to a stronger dollar. So as with many of these things it’s a bit like untangling spaghetti. You can’t necessarily do one without the other. And that’s the self-limiting factor too. 

It’s why equities had that big jolt upwards, and we really haven’t followed through. We’ve more traded sideways since let’s say Wednesday, Thursday, last week. Because you have these cross currents, because you have interest rates providing a bit of a damper on the stock market because you have a big round number, which typically is psychologically tricky to get through. 

So, it’s hard to expect the S&P to get to 6,000 and then just rocket right through. It doesn’t always work that way. These are all the various crosscurrents that we see. I think it will take a bit of time till we really see how the quote unquote Trump trades pay off. Although I do think the most interesting one is actually the reaction or lack thereof to DJT stock itself, which I think really front ran the election and it’s been sideways to downward since. 

Andrew Wilkinson 

You mentioned that the Fed cut interest rates by 25 basis points just after the election, Steve. And you recently said tariffs, tax cuts, deportations, and threats to the Fed’s independence have all been raised during the campaign. What’s your latest thinking on the outlook for monetary policy through the end of the year then? 

Steve Sosnick 

I wrote about this one today, actually, Wednesday as we’re taping this. I get the sense that, you know, and the term I used was the Fed might be spiking the ball before it gets to the end zone. And for those listeners who are not necessarily big fans of American football, to score a touchdown, you have to be carrying the ball as you go across the end zone line.  And it recently happened in a Jet game.  It’s happened a few times before, but most recently to the Jets who are my team.  One of my flaws in life is rooting for them.   The guy was basically at the first time he ever came anywhere near the end zone, and he dropped the ball as he was crossing in his celebratory moment.  

And my thinking here was in light of the CPI numbers that came out today, they were bang in line — and I look at month-over-month because my feeling there is if you look at a yearly number, you’re looking at 11 months of old data and one month of new data, why not just look at the one month of new data?  So, on the headline number, we were at 0.2%, on the core number, we were up 0.3%. The headline number — and Jose Torres, our Senior Economist and I have discussed this — a lot of the benefit that’s gone to the headline number has come from, as we discussed before, energy, other commodities and stuff like that, which, again, those benefit from a stronger dollar because many of them are denominated in U.S. dollars.  

If we have a stronger dollar it requires fewer of those dollars to buy the same amount of those commodities. But in terms of services, which are very sticky, those haven’t really come down. It’s been three months in a row of 0.3%. A lot of economists prefer to annualize the last three or four months of data. 

If we annualize those last three months of data that annualizes to 3.6%, just about 3.6%. Last I checked, 3.6% is a bit greater than the 2% Fed target. And yet the Fed Funds predictions, whether we look at IBKR ForecastTrader or whether we look at the CME FedWatch, when I looked earlier, the ForecastTrader was at 77% chance of a cut. Or 77% that the Fed funds rate won’t be above 4.375% in December. The CME Fed Watch had an 82% probability that it would be a 25-basis point cut, and the Fed hasn’t really said anything to dissuade us from that thinking. 

The Powell Fed is not big on surprises. So, if we look to say the market saying there’s a very high probability of a rate cut and nobody at the Fed, at least so far, has really pushed back on that notion – it doesn’t mean they won’t, but they haven’t yet — then the market’s probably right to expect it. 

But at some point, the continual question I ask myself and I ask others is, “why”? I understand they’re concerned about labor slowing down. I called it sort of disinflation of labor. The labor market is slowing, but not slow, in the same way that disinflation means the prices aren’t going up as there, they aren’t going up as fast, although they are still going up. 

And I think that’s where we are with labor. So, I think the Fed is being proactive, but they keep using the terms that we’re in restrictive monetary policy, and my counterargument is based on what?  Based on an r* that they’re not telling us where it is? Based on record high stock prices? Crypto prices going insane, which are the most speculative assets? Corporate credit spreads being as tight as ever?  And with investment banks telling us in their third quarter earnings reports that they had a record investment banking revenue because they were just pumping out corporate bonds that there were eager buyers for? 

Have you heard any anecdotal evidence of anybody who’s a decent credit having trouble getting money? Obviously, it’s harder if you’re a poor credit. And so, we’re restrictive based on what? That’s why I wonder what is the Fed’s rush to do this?  

Now the one pushback is when the Fed cut rates in September, the 50-basis point cut, which was in play, we knew they were going to cut something. And then was a Wall Street Journal article that came out that was clearly a tip off from the Fed basically leaning everybody towards 50 basis points. The terminal rate, let’s call it the rate for December 2025, for a year plus out, had moved down to 2.75%. As of today, that rate is closer to 3.75%.  

So, the market’s adjusted its viewpoint. Now, the interesting thing is the median dot on the dot plot that came out in September. They do that every other meeting, so there was not a dot plot in November. The median dot there was 3.375%. So actually, for the first time in a long time, call it a year plus or more, the market’s been predicting more from the Fed than the Fed was willing to give. Remember the six or seven rate cuts that we were talking about at the end of last year, beginning of this year? 

And so, it’s interesting here. And I think that’s partially when I talked about disentangling spaghetti, it’s a little hard to disentangle where the rate cut expectations are coming from. I don’t think that’s all specifically a Trump trade thing, but you have tariffs, you have a president who has threatened the Federal Reserve Chair. The most blunt thing that Chairman Powell said at the last press conference was, “are you going to resign? No.” So that was pretty clear.  

Again, it’s tough to figure out what exactly might be getting the bond market a little more reticent to expect future rate cuts.  But this is where it all becomes difficult to untangle because we’re looking at a lot of uncertainty, 

Andrew Wilkinson 

Steve, the last thing I wanted to ask you, chip making giant Nvidia (NVDA) was recently added to the Dow Industrials average. How exciting is that for you? 

Steve Sosnick 

We redid our website a few years ago. It was one of the first things I’d written for Traders Insight, and a lot of the early stuff just got lost. It got revamped and wasn’t saved properly. Like those film libraries were where stuff just vanished. 

And one of the first pieces I wrote was why we should basically put the Dow out of its misery. And I know it has its fans and whenever I write about something like that, I get pushback, and I understand it. It’s easy. It’s what people do. It’s what people are used to. 

And there’s a lot of things we do, not because they’re optimal, but because it’s what we’re useful. You can put that down to why we still sign our credit card receipts instead of putting in a pin. The same reason the U.S. sticks to the English system, not the metric system, when even England doesn’t stick to the English system. 

A few things of that nature. So, we’re a stubborn bunch here. And so that’s where it comes from. But to me the simplest argument is there’s two things that kind of spooked me. Number one, it’s an average. It’s what Mr. Dow could do in the late 1800’s to measure the market, which was take the prices and divide them in those days by 12. 

And it was pretty simple, but when you have an average, the higher the price –in this case, when your average is all of stock prices — the biggest number gets the biggest weight. So, Sherwin Williams (SHW), which also entered the Dow at the same time, has a stock price roughly three times that of Nvidia’s. Therefore, Sherwin Williams has three times the weight in the Dow that Nvidia does.  Despite having about, I think, it’s about a 36th of the market cap. And probably even a smaller share of the market’s mind share. Cause Nvidia certainly had been number one for most of the year, although lately Tesla’s pushed back ahead of it in terms of volume and mind share. 

But certainly, Nvidia is the poster child for the recent rally. Not Sherwin Williams, yet there we go. And the other thing about the Dow, because it’s only 30 stocks, it’s got a certain amount of arbitrariness to it. And the company that Nvidia replaced was Intel (INTC) which think back to the earlier part of the century, this century, and Intel was the poster child for the semiconductor. 

Interestingly, Nvidia entered the Dow in October of 1999. Pretty much, call it twenty-five years ago, not exactly to the day, but pretty close. And those who remember market history will remember that that was pretty much the peak of the Internet. We were nearing the peak of the Internet bubble. It then peaked sometime around March, depending on your measurement, whether it’s a Nasdaq, whether it’s S&P 500, it peaked early in 2000 after the Y2K liquidity pump. 

And then when that liquidity got sucked out, that pretty much was the end. Is that telling us something auspicious about the AI trade? Considering the parallel of Intel going in just before the end of the internet trade and, could Nvidia be going in just as the AI trade is running out of steam? 

Mag7 has actually been somewhat underperforming the rest of the market in this little run up of late. Way too early to call that. When I talk about like the weighting differentials and then throw in the bad karma on top of it, I’m not particularly enthusiastic about this move. 

But also, when you get down to it, other than “Diamonds”, the DIA ETF, there’s really not much in the way of money that tracks the Dow. Whereas in terms of the S&P 500, between SPY and VOO and the trillions of dollars in pension and mutual fund money that’s tracked to the S&P 500, it’s pretty clear the market’s voted already and the markets the market has told you that they prefer the S&P 500 as an index measure to the Dow. 

Andrew Wilkinson 

Gotcha. I know I said finally about the Nvidia question there, Steve, but finally, what’s the number one question you’re getting asked now by reporters? 

Steve Sosnick 

It’s either, “will higher yields slash the stronger dollar” and/or “will the stronger dollar be a self-limiting factor for the equity market?” And it’s the stuff we were discussing earlier. And potentially, yes, I think right now where yields are, they’re not enough to derail stocks in and of themselves. If we start to get closer to 5%, which is reasonably long way away right now, I think that becomes a problem.  

Same with the dollar. Higher yields, stronger dollar. At some point multinational companies are going to have to start reckoning with the idea that this currency translation is harmful to their earnings. I think companies are extraordinarily loath to cut guidance because it’s one thing to manage your analyst expectations for the coming quarter. 

They’re good at it. That’s why 75% or 80% of the companies beat in any given quarter is because they’re very good at that. But when you start to talk about guidance and you’re talking about a market derived number, because currency markets are no easier to predict than equity or bond markets, I think they’re a little loath to talk about that. But at some point, those translations could start to hurt the multinational companies. And those are the big companies that really drive this market. So those are the questions I’m asked a lot. And again, they’re very difficult to ponder because we’re in a very fluid environment right now with the change in leadership. 

Andrew Wilkinson 

Don’t forget you can catch Steve Sosnick’s commentary at Traders Insight on the Interactive Brokers Education page and remember to subscribe to each of our episodes wherever you download your podcasts from. Steve, thank you very much for joining me today.  

It’s been an education. 

Steve Sosnick 

My pleasure, Andrew. We’ll talk again soon. 

Andrew Wilkinson 

Thanks, mate. Bye bye. 

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