A cinematic sequel to “Clash of the Titans” could play out on Wall Street in 2025. This epic struggle, mirroring the battles between Zeus and Hades in Greek mythology, may pit the stock market against the bond market when determining which forces will be unleashed on the U.S. economy in the months and years ahead. In the wake of President-elect Donald Trump’s Nov. 5th victory, the stock and bond markets have had decidedly different reactions to the news. Initially, the stock market surged, while bonds sold off and drove interest rates higher. Both markets were anticipating outcomes that are in direct conflict with each other. In the case of the stock market’s initial and powerful reaction, traders looked forward to a series of business-friendly policies involving larger corporate tax cuts and broad deregulation. The incoming administration has signaled that it plans to enact the following: Extend the Tax Cuts and Jobs Act enacted in Trump’s first term Cut the corporate tax rate to as low as 15% from its current level of 21% Repeal the $10,000 cap on the state and local tax deduction Offer additional tax reductions on tips , Social Security income and on overtime pay. Rolling back regulations from the Biden administration is also a top priority, with a particular focus on the following: Easing environmental restrictions across many industries Reducing capital requirements on banks Opening up oil drilling on federal lands and offshore Taking an industry-friendly approach to cryptocurrency Despite last week’s pullback in the stock market, the S & P 500 is higher by nearly 24% in 2024, while the Nasdaq Composite is toting a 26% year-to-date advance. Worries in the fixed income market In the meantime, the bond market appears to be fighting, rather than celebrating, some of the proposals from a returning Trump administration. The bond market, along with other inflation indicators, have shown some concern about the notion that tax cuts pay for themselves. There have also been worries that the Trump tax cuts, if extended, would add considerably to annual deficits and the sum of the national debt. Further, Trump has called for across-the-board tariffs of up to 20% on imported goods, with another proposed duty of 60% on goods coming from China. Many economists and the bond market fear the imposition of broad – rather than targeted – tariffs are inherently inflationary. They would lift the cost of goods and services for just about every American family. Mass deportations could be both inflationary and recessionary – or to put it another way, stagflationary. This move would shrink the available labor pool and drive up wages, while also reducing the consumer base. This would reduce not just consumption, but also, federal tax revenues. Like Hydra, the economic aftermath of such a draconian policy would be multi-headed and tough to slay, once implemented. The president-elect is also intent on creating the Department of Government Efficiency , or DOGE, led by Elon Musk, the world’s richest man, and Vivek Ramaswamy. Musk and Ramaswamy, who reportedly would identify ways in which to slash federal spending and eliminate waste, fraud and abuse in the system, have suggested that there’s $2 trillion in available reductions . That’s equal to nearly one-third of all government spending in fiscal year 2024. About $1 trillion of the budget is spent on non-defense discretionary items. Around $3.8 trillion is earmarked for mandatory programs , which include Social Security, Medicare and Medicaid, according to the Congressional Budget Office. If $2 trillion were quickly slashed from the budget, there would be widespread negative consequences. The contradictory nature of all these policies taken together muddies the economic outlook considerably. The bond market has shown more concern about the mix of the incoming administration’s policies which, many economists claim, could stir a toxic brew of inflation, recession and potential financial instability. The stock market’s track record as a predictive tool for assessing the future growth prospects of the economy is a bit spotty. This is less the case for the bond market. I would focus my attention on the less watched of these two titanic markets to determine what’s coming our way in the months ahead. The stock market is viewed more favorably by many, as was Zeus in “Clash of the Titans.” However, the bond market, in the guise of Hades, may be more a powerful and real adversary in this earthly realm. The result of this battle may well be one for the ages. I think Hades may have the upper hand this time around. — CNBC contributor Ron Insana is CEO of iFi.AI, an artificial intelligence fintech firm.
Stocks’ big surge after Trump’s win may be overshadowing economic fears
