How Stocks and Bonds Reacted to Trump’s Victory


Dec. 4 2020, Updated 10:53 a.m. ET

Gold has rallied recently with the return of political uncertainty. But Russ points to another factor that suggests the gains can continue: inflation.

When I last wrote about gold, I discussed the argument for gold as a potential hedge against volatility. Now, in recent weeks political uncertainty has returned, and with it, volatility. The VIX Index recently traded to its highest level since early September. As risky assets like equities and high yield bonds have come under pressure, gold has rallied roughly 4% (source: Bloomberg).Still, many investors remain concerned that gold will falter in an environment of rising rates. Although this is a reasonable concern, it is important to note that gold’s prospects are highly dependent on not only the direction of interest rates, but also why they are rising.

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Historically, gold typically comes under pressure when real, or inflation adjusted, interest rates are advancing. Since 1972, the level and change in real 10-year Treasury rates, along with changes in the dollar index, have explained roughly 30% of the change in the price of gold. This makes it easier to see why gold sold off in the late summer and early fall: Real 10-year yields rose roughly 15 basis points (bps, or 0.15%) between late July and early September (source: Bloomberg).

Market Realist – How did the markets react to Donald Trump’s victory?

While the markets were slowly preparing themselves for a Hillary Clinton win in the November 8, 2016, presidential election, Donald Trump suddenly came out the victor. His win took the country as well as the markets by surprise.

The CBOE Volatility Index (or VIX) had recorded an upswing from the second to the last week of October 2016 through election day. Then the index suddenly rose 6.0% on November 9, 2016, after it was clear that Trump had unexpectedly clinched the election and would be the next president of the United States.

The S&P 500, the Nasdaq, and the Dow Jones had all risen by the end of the day on November 9. The gains were driven by the healthcare (XLV) (XBI), financials (XLF) (KRE), and industrials (XLI) sectors, as expected.

Returns from stock indexes, especially the Dow Jones, have been on an upswing since the election. They fell a little on November 16 but picked up again. The Nasdaq started picking up on November 15 after falling a little after the election results.

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Treasury yields and bonds

Treasury yields are on a rising spree, reflecting falling bond prices. The yield on ten-year (TLT) (TBT) (IEF) and five-year Treasuries rose 10.1% and 9.5%, respectively, on November 9, 2016.

The BofA Merrill Lynch US High Yield Effective Yield had the highest growth rate of 5.0% on November 14. Rising bond yields imply lower prices. The Trump win broke the positive correlation between stock and bond prices during periods of uncertainty and inflation.

What about gold?

Gold (GLD) (IAU) prices closed below $1,300 per ounce and fell 0.10%. The fall in gold continued after the election, falling more than 5.0% on November 14. The value of the US dollar compared to other world currencies rose more than 1.0%.

In the next part of this series, we’ll find out why the Fed rates are still so low.


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