What’s going on here? Between the US election results on Wednesday and interest rate cuts on Thursday, investors have been upping their bets on higher-risk assets. What does this mean? Lower US interest rates mean investors can expect slimmer returns on the safest of assets, like cash in the bank and government bonds. That’ll encourage them to buy into riskier things like stocks and crypto in the hopes of bigger profits. Not that they’ve needed a lot of encouragement this week: investors simply carried Wednesday’s post-election “risk-on” rally into a second day, as it became increasingly clear that the president-elect’s own party could have full control over the US government, removing any potential political blockers to its agenda. And making space in investors’ portfolios were bonds: they were sold off, and their yields rose (remember, bond yields move inversely to prices). Why should I care? Zooming in: Investors take their pick. Proposals to lower tax rates for companies, loosen regulations for industries, and drive local US investment should all be a boon for the country’s stocks. So banks – which represent 5% of the S&P 500 – were rallying on hopes of a less restrictive set of rules. Meanwhile, carmakers Ford and General Motors raced higher on expectations that rolled-back EV incentives and emissions standards would rev up demand for their more profitable gas-guzzlers. And in crypto, bitcoin was hitting record highs, seemingly just because the incoming president commented in favor of digital currencies. The bigger picture: Still plenty that could go wrong. A lot needs to fall into place to keep America’s risk-on rally rolling, and loads of things could derail it. Campaign pledges like global trade tariffs – if they happen – could ignite inflation or spark an all-out trade war, and the effects could range from a longer spell of high interest rates to a full-blown recession. Given how much debt the US is carrying now and the amount it could rack up in the next few years, that might be pretty catastrophic. |