Something curious just happened. For months, interest rates have been spiraling lower and lower. Back in July, the rates came in at about 2.4%. And still, they went down, bottoming out at 2.0%. But, since September 7, they have been on a steady rise.
Just what happened on that day to make interest rates do an about-face?
September 7 was the first day after President Trump made a deal with the Democrats in Congress to extend the debt ceiling. The purpose was to avoid a government shutdown and to provide additional relief for Hurricane Harvey’s victims. As it seems, there was another, unforeseen, result – a rallying of rates.
This isn’t me making political commentary; it’s merely an observation of fact. From where I stand, Washington has been driving Wall Street ever since the election, and the past two weeks serve as a perfect snapshot of this point. When Trump makes a move, even an unexpected one like being a shrewder negotiator and siding with the Democrats, our market takes notice and responds.
Perhaps even more interesting is the question of whether this latest iteration of economic reflexivity to politics signals more big changes on the horizon. Could it be that this collaboration and rate change serve as foreshadowing for the passage of Trump’s tax reform policy?
Interestingly, since Trump’s deal with the Democrats, the 10-year Treasury Yield, which serves as the proxy of national lending rates and the bond market, has headed higher. The yield has climbed from 2.0% to almost 2.3%.
While this may sound like small potatoes, it’s actually a big move; this rise translates into a 15% increase in rates and signals a better economy. While we all notice if the stock market trends up 15%, most of us make short shrift of the same change in the bond market. But it’s worth paying attention here, too.
Turning to stocks, there has been a corresponding reaction in the market. We’ve lived through the most range-bound, placid week in the stock market since 1972. That’s right. We recently had the most flat-line week since 1972. Since Trump’s deal, however, related stock sectors were shaken loose and have made some interesting and serious moves.
Let’s recap the recent movement: financials are at +5.2; industrials, +4.3%; energy, +4.1%; with the S&P at only +1.5% during the same period of time. So, it would appear that the Trump trade has, to some extent, resumed.
The polling on these recent events is also noteworthy. Recent Wall Street Journal and NBC polls show Americans’ opinions on Trump’s policy decisions. When it comes to our president and the overall economy, 41% approve and 39% disapprove. With Trump’s response to North Korea, 36% approve and 43% disapprove. And Healthcare? About 27% approve, while 53% disapprove. Let’s not forget our president’s Twitter account. Here, 23% approve and 66% disapprove of Trump’s tweets.
But, when it comes to working with the Democrats to raise the debt ceiling and to increase hurricane relief, an impressive 71% of Americans approve, while only 8% disapprove.
Of course, I’m always leery of polling data. With this poll in particular, I was concerned the high percentages of disapproval signaled that more Democrats than Republicans were queried. After all, on most policy issues, Trump faced substantially more disapproval than approval (except for his recent work with the Democrats). But as I took a closer look at the data, I found the survey seemed balanced between respondents from both parties, and actually had a more “conservative” slant.
From my perspective, this poll is actually telling us something of significant import: American voters, who are deeply invested in how the economy works, also want to see things work in Congress. What we see from the poll is the approval Americans have for some sort, any sort, of progress when it comes to congressional dealings. Period. And this sentiment travels across party lines.
Of course, we may not see much more happen until mid-December when the debt ceiling debate resurfaces. But look at it differently, and it seems both the stock and bond markets are signaling that the possibility of passing tax reform is getting better and better.
Whether you call it tax reform, tax revision or tax relief, the bottom line is that the new tax policy will be good for equity markets. The policy would inherently increase earnings for corporations, as they would keep more post-tax revenue. In the same way, individuals’ cash flow would increase due to lowered tax rates. And let’s not forget that a tax deal could bring back trillions of corporate dollars currently stashed overseas, and make our nation a more welcoming place to do business with other corporate reform.
If that’s not good for stocks, I don’t know what is. From a bond perspective, the economic activity increase under tax reform would stimulate the economy and inflation. This stimulus could push the Fed to raise rates (again). Looking back to the flurry of economic activity that started on September 7, the rise of interest rates may be hinting at this already.
These points may not yet be clear, but what is beyond crystal is that it’s good for the economy and all Americans when our government works together to get things done. Let’s hope that the recent collaboration is but the beginning of more cooperation, for the betterment of our nation and our people.