The day after the election last November, the stock market enjoyed a really strong day, while the bond market did not. That was not at all surprising. The election brought the likelihood of lower taxes and less regulation, both of which make equities more attractive. It also brought fears of higher inflation, which tend to drive interest rates up and make bonds less desirable. Things have changed A LOT since then with all of the uncertainty but therein lies a critical lesson.
Historically, it has been quite common — and quite natural — for stocks and bonds to move in different directions. When large institutional investors feel good about things, they tend to buy stocks with the expectation of future earnings and profits. When they are more concerned, they move vast sums to safety, which for decades has meant US Treasury Bonds. The obligations of the US government have long been the “gold standard” for financial security and the world’s undisputed definition of a politically risk-free asset. Through close elections, major policy shifts, wars, terrorist attacks, pandemics, excessive debt, and mortgage meltdowns, the strength of US economic and political institutions has at times been challenged but inevitably reigned supreme. That is, at least, until the morning of Wednesday, April 9, 2025.
As the tariff fiasco unfolded early in that week and it became apparent that even greater fiscal deficits were likely on the horizon, the equity markets saw dramatic drops and investors shifted into bonds. The results were painful and quite unnecessary, but at least predictable.
