Wall Street Rejoices, Bull Market Risks Linger: Can Trump's Return Sustain Prosperity?

Wall Street Rejoices, Bull Market Risks Linger: Can Trump's Return Sustain Prosperity?While Wall Street has been filled with doubts about the market's persistent rise this year, signs indicate they might be overly pessimistic with Trump's return. In just five trading days, over \$2 trillion flowed into US stocks, with \$20 billion entering funds on Wednesday alone

Wall Street Rejoices, Bull Market Risks Linger: Can Trump's Return Sustain Prosperity?

While Wall Street has been filled with doubts about the market's persistent rise this year, signs indicate they might be overly pessimistic with Trump's return. In just five trading days, over \$2 trillion flowed into US stocks, with \$20 billion entering funds on Wednesday alone. Small-cap and bank stocks are particularly shining, and Bitcoin is hitting new highs. Pure optimism is sweeping Wall Street.

Trump has promised tax cuts and deregulation to fuel economic growth. This, coupled with the Fed's loose monetary policy, will inject new life into an already prosperous economy. Bonds are the only asset class declining in this growth cycle, driven by concerns about the high cost of fiscal stimulus. However, even US Treasury yields showed signs of retreating over the weekend, with the 10-year US Treasury yield now at 4.305%.

Trump's return has dispelled the gloom hanging over US stocks, infusing the entire market with an optimistic atmosphere. This week, the S&P 500 climbed 4.7%, marking its 50th new high this year. The VIX index saw its largest single-week decline since 2021. Bitcoin broke through \$75,000 for the first time, and Dogecoin also hit a new record. Investment firm VanEck's Matthew Sigel boldly predicts that the Bitcoin bull market is "stronger than ever," with a potential reach of \$180,000 next year and even \$3,000,000 by 2050.

Driven by the pursuit of higher returns, investors are willing to take on greater risks despite high-yield spreads hovering at their narrowest levels since 2007, pouring money into junk bond ETFs. Bloomberg's risk appetite index, which tracks small-cap stocks, high-yield bonds, and other indicators, saw its highest weekly inflows since 2016 coincidentally, the year Trump first won the presidential election. JPMorgan Chase noted a surge in retail trader activity in the options market, reaching record levels in the days leading up to the election. Meanwhile, veteran analyst Mike Mayo is optimistic about Bank of America's prospects, stating that the bank is undergoing a "paradigm shift."

Wall Street's optimism is reaching its peak, with respected strategist Ed Yardeni even expressing concern about his own conservatism. He believes the future holds a full-blown "Roaring Twenties" of prosperity. Yardeni stated, I have been outgunned by the stock market. I think were in a bull market that will continue all the way to the end of this century."

However, the bull market's "run" may lead investors to overlook persistent economic and other areas of weakness. In September, the S&P 500 plunged over 4% due to weak employment data. Last month, market panic intensified, pulling the S&P 500 down nearly 10%, and the VIX fear index soared to a 30-year high.

"Long term, we may be getting ahead of ourselves," said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. "Short term, this is absolutely a risk event. I think the risk is higher with Trump as president."

Bond fund giant PIMCO warns that Trump's post-return policy agenda could lead to heightened inflation and an overheating economy, hampering the Fed's ability to cut interest rates - a dangerous sign for the stock market. In fact, the S&P 500 returns during Trump's first term slightly lagged those under Biden, despite the former consistently mocking the latter's economic policies.

After two years of strong gains, US stock valuations have climbed to record highs, posing one of the biggest risks to the market. Although Trump has highlighted the stock market surge as a highlight of his administration, the current overvalued environment makes stimulating the market even more difficult. Moreover, market expectations regarding the Fed's monetary policy have shifted, with numerous financial institutions lowering their expectations for rate cuts by 2025. Trump's administration's immigration restrictions and tariff policies could trigger inflationary pressures, forcing the Fed to take a more cautious stance.

Behind the market revelry lie numerous risks. Will Trump's return continue the prosperity, or will it ignite a new economic storm? Time will tell.