Caijing News on November 18 (Editor Xiaoxiang) After the risk asset frenzy following the election, investors in the US stock market finally began to gradually calm down last week because Federal Reserve Chairman Powell seems to intend to slow down the rate of interest rate cuts, which has cooled the excitement generated by the 'Trump trade.'

With the US labor market still strong, economic data performing well, the head of the 'world's most important central bank' is not eager to relax monetary policy, which has helped drive up US bond yields again, dragging down the stock market. The S&P 500 index fell 2% over the past five trading days, erasing half of the gains since the election. Coupled with the decline in credit assets and commodities, last week's market return across asset classes hit the lowest level in 13 months.

Undoubtedly, looking at the market performance in recent trading days, investors' excessive optimism about President-elect Trump's pro-business policies such as tax cuts and deregulation is fading, and a more rational mindset is gradually prevailing.

One concern is: The Republican fiscal agenda may potentially reignite inflation, potentially forcing the Fed to cut rates less than expected.

Another worry is that the valuation of US stocks may already be too high. If economic growth disappoints, or if inflation rears its head again, there is little room for error in the current market situation. An industry model adjusted for inflation of the S&P 500 index returns and 10-year US bond yields shows that the pricing of these two most closely watched assets globally is at historical highs. In fact, in data going back to 1962, the cross-asset valuation based on real value (excluding inflation) is now higher than 88% of the time.

John Davi, Chief Investment Officer of Astoria Advisors, said, "Current market valuations are expensive. Powell's speech last Thursday basically meant that Fed officials do not need to rush to cut interest rates, which may be the main reason for the sell-off we are experiencing."

Last week, at a dialogue organized by the Dallas Fed with local business leaders, Powell said, "The economy has not signaled any need to quickly lower interest rates, and the better economic conditions give us the ability to be cautious in decision-making."

The hawkish remarks quickly caused a stir in the global markets: the yield on the 10-year US Treasury bond hit its highest level in four months last Friday as traders reduced bets on a December rate cut by the Federal Reserve. Better-than-expected retail sales data and robust inflation performance also caused many traders to be on edge.

Data shows that the RPAR risk parity ETF, which tracks from treasuries to stocks to commodities, fell by 3.2% last week, marking the largest decline since October 2023.

The S&P 500 index also failed to hold above the 6,000-point level it breached earlier in the week. The performance of the e-mini Russell 2000 index, a typical representative of the 'Trump trade,' fell by 4% last week, marking the worst week in over two months. Ahead of chipmaker NVIDIA's highly anticipated earnings report in the center of the AI craze, the Nasdaq 100 index also experienced a decline.

Is there still a chance for the 'Trump trade'?

Undoubtedly, the recent correlation between US bond yields and US stock trends has clearly been enough to once again draw high levels of investor attention.

The market conditions over the past week are clearly very different from the previous four weeks: in the previous four weeks, the rise in US bond yields was seen as evidence of economic resilience, which was still a positive signal for risky assets like stocks. But now, despite the Fed entering a dovish cycle, US bond yields are still rising, and inflation threats have returned to traders' focus, showing signs of a cooling risk appetite that swept through Wall Street after Trump's victory.

The recent two months of weakness in the US bond market (rising bond yields, leading to a decline in bond prices) has nearly erased all the year's gains. The Bloomberg US Bond Return Rate Index shows that the index's gain for the year has rapidly decreased from its peak of 4.6% on September 17 (the day before the first Fed rate cut) to around 0.7%. This marks a disappointing continuous decline in the world's largest bond market.

Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, said, 'As the market shifts its focus from the current resilient economic growth and more robust inflation forecasts to the future upward risks in growth and inflation under the Trump administration, the outlook for Fed policy rates and the entire yield curve has become more hawkish. In this tug of war, interest rate uncertainty appears to be prevailing, suppressing risk appetite.'

Scott Chronert, head of stock strategy at Citigroup in the USA, stated that the long-term rise in US bond yields has always been seen as a potential 'by-product' of Trump's extensive fiscal expansion, putting pressure on the market as it has already digested many bullish news.

In a report, he wrote, "The macro and fundamentals face enormous pressure, which may explain some profit-taking phenomenon after the rapid rise post-election. Market behavior reflects participants' feelings: exhaustion."

Certainly, rationally speaking, although last week's market sell-off was shocking, especially with the Nasdaq 100 index dropping by over 2% on Friday, the market reversal last week, in a year where US stock investors have already gained trillions of dollars in new wealth, can hardly be seen as a meaningful small episode.

After the S&P 500 index achieved its biggest one-year gain and small cap stocks saw their fastest rise since 2020 in a week, the excitement over the election subdued last week, which may also be inevitable.

JPMorgan's strategist team, including Nikolaos Panigirtzoglou, compared the prices and fund flows of various assets with the first eight weeks after Trump won the presidential election in 2016. At least based on this historical basis, they concluded that there is still room for further upside in the 'Trump trade'.

JPMorgan's sales and trading team led by Andrew Tyler is also optimistic about this. Tyler wrote in a note to clients, "The consequences of the economic recovery seem to be that the Fed's easing cycle may be shortened, but this is not necessarily a bad thing for the stock market. Although the repricing of US bond yields may bring some short-term negative reactions to the stock market, the economy's strength still supports our bullish tactical view on the stock market by the end of the year."

Editor / jayden