How Far Will Trump Rally 2.0 Fly?

Although the stock market is flying high in another Trump Rally, similar so far to what it did right after his election in 2016, Larry Fink says that where the stock market goes from here is still up to the bond market. That fully supports what I recently wrote about as the topic of a Deeper Dive:

The stock market’s story for 2025 is going to be the story of the bond market. And the story of the bond market is going to be the story of inflation.

Says, BlackRock’s Fink,

“I’m cautiously optimistic. That being said, I have scenarios where it could be pretty bad,” Fink said Thursday on CNBC’s “Squawk Box” from the World Economic Forum in Davos, Switzerland. “I believe if it’ll unlock all this private capital, we’re going to have enormous growth. At the same time, some of this is going to create new inflationary pressures. I do believe that’s probably the risk that is not factored into the markets. I think the bond market is going to tell us where we’re going.”

So, inflation and the bond market’s response, as I wrote in that Deeper Dive are going to become the story of where the stock market is headed in 2025.

“There are some very large inflationary pressures that we all have to be aware of,” Fink said. “And depending on how this plays out, there is a scenario where we’re going to have much more elevated interest rates because of inflation. And that’s going to have a very negative impact on the equity market.”

He even places the Maginot Line in bond interest, as I’ve been referring to it, where I placed in that article:

Fink said there is a possibility that the 10-year Treasury yield could retest the 5% level and even reach 5.5% if inflation reaccelerates in a meaningful way. If that happens, Fink said it would “shock” the equity market.

Though I don’t like the Fink at all, he does know something about stocks and bonds; so, when he warns of trouble, given the enormous bond funds BlackRock manages, it’s worth noting.

Trumping oil at the WEF

While oil seeped down just a little in price after Trump was elected, it is, so far, still holding the high ground that'll add to the inflation of everything if it remains up there; however, Trump’s “drill, Baby, drill” should bring those prices down eventually when the drilling goes into production; and, because the market bets ahead, that announced policy could even bring oil prices down in the current speculation, which would keep oil from jacking up all other prices down the road as the main energy ingredient and even chemical ingredient in just about everything.

Nevertheless, even Trump in his WEF speech (see video below) commented that he was surprised to see oil holding high, and he blames it on the Saudis not giving him an increase in production as the inauguration gift he had been expecting, which he says was “not nice” of them, though the crown prince, Mohammed bin Salman (MBS), is “a good guy.” He used the speech to crank up pressure on the Saudis, oddly even blaming them for the war in Ukraine, which he says would end right away if they dropped the price of oil, presumably to put more pressure on Putin’s failing economy (also a story in the news below).

Regardless of the possibility that the Saudis will respond to Trump’s WEF pressure and raise production to lower oil prices, plenty of other pressures will be added to inflation with Trump’s tariffs and deportations to drive the cost of doing business up. While a few economists in the Trump camp debate whether tariffs boost inflation that much, I don’t anyone is arguing that tariffs are going to let pressure off. Not adding more pressure is the best-case scenario.

Nor is the increase in the cost of labor that must be born because of the mass deportations that Trump announced to the WEF recently going to lower inflation. While the immigration of millions, many of whom are even illegal, should have never been allowed in such enormous and destabilizing numbers in the first place, there is no way around the math that adjusting out of those bad policies in one fell swoop, is a massive transformation that will create an earthquake in labor. It can only mean increased labor costs as the cheap labor rushes out of the country. (Good for US workers’ wages and unemployment—so long as insufficient labor supply doesn’t shut down production lines—but not good for inflation.)

With new jobless claims rising slightly in the recent report, continuing claims hit their highest point since November 2021, when we were still clawing back ground lost due to the Covid lockdown the year before.

A dowdy economy ahead

Edward Dowd also makes a case from his annual report, covered below in an interview with Daniela Cambone, that the fraudulent or completely inept labor reports of the Biden Administration last year are going to smash the market with reality about labor this year.

Cambone, suggests that, at all costs, Trump who loves only positive headlines, will keep the truth hidden. Dowd believes he will let the truth out. I am more with Cambone on that: Trump is not one to let truth crash his beloved market with reality during his term, given how he has flaunted stocks as a gauge of his success in the past; so, the administration may keep the truth under the same veil Biden did, since the Bureau of Labor Statistics is a natural at that, anyway.

All the same, there will, as Dowd says, be new annual revisions coming out soon. Those have tended lately to come out huge to the downside. On the other hand, I haven’t seen that the stock market cares all that much about the truth coming out on past exaggerations of good news. It’s done with that news and keeps its eyes forward.

Another major current development, as opposed to past news from the Biden administration, that Dowd says will hit the economy and stocks are credit creation, which is diminishing as bond rates drive up all interest that is pegged on the ten-year bond or other Treasuries—another factor I laid out in that Deeper Dive. That, I think, is a big thing. It is the way the bond market will not just hit stocks with competing returns, but the way it clobbers the whole economy outside of the Fed’s control when the bond vigilantes are in force.

And that brings us full circle back to Larry Fink’s warning. Huge new issuances of government bonds to keep financing the government and rising inflation mean rising bond interest that could hit that 5.5% line that wipes out stocks, too. That competes for available funding in the commercial world, also driving up commercial bond rates, and slowing commercial credit creation. Rising bond interest can, ironically, also wipe out bond funds that already hold a lot of low-interest bonds that may have to be sold at a loss and can diminish bank reserves that hold a lot of low-interest bonds that were not designated as “hold to maturity” so that they have to be devalued.