Financial Market Responses

📊 Investors React to Election Results: Winners and Losers Investors are showing clear preferences after election results. Here’s a breakdown and the underlying drivers: 🔼 Top Performers: - Financials (+6.16%): Tax cuts and lighter regulations are expected to spur economic growth, which benefits financial institutions. Increased spending could lead to more borrowing and investments, driving the sector forward. - Industrials (+3.93%): Pro-business policies, such as reduced regulations and tax cuts, fuel economic growth, making industrial stocks more attractive. Additionally, companies with a domestic focus benefit from tariffs that penalize imports. - Consumer Discretionary (+3.62%): Increased economic growth and potential tax cuts often lead to higher consumer spending. Sectors like retail and leisure could see a boost as disposable income rises. Energy (+3.54%): Less regulatory pressure on traditional energy sectors like oil and gas could increase production and profitability, driving up stock values in this space. - Information Technology (+2.52%): Although international tech companies may feel the pinch of tariffs, domestic-focused tech firms are still poised for growth, especially with a potential boost from stronger economic conditions. 🔽 Underperformers: - Utilities (-0.98%) and Consumer Staples (-1.57%): These defensive sectors generally underperform in a high-growth, high-inflation environment. With the prospect of economic expansion, investors tend to rotate out of safe-haven assets into more cyclical stocks. - Real Estate (-2.64%): Higher interest rates, expected because of inflation, could make borrowing costlier, negatively impacting real estate investments. 💬 Key Drivers Behind Market Sentiment: - Tariffs: Domestic-focused companies benefit as tariffs make imported goods more expensive. However, this could harm companies that are heavily reliant on international markets and supply chains. - Tax Cuts & Reduced Regulation: Expected tax cuts and deregulation catalyze higher economic growth, favoring cyclical sectors like financials, energy, and industrials. - Defense Spending: Increased defense budgets could provide tailwinds for contractors and related industries. - Inflation & Interest Rates: Higher interest rates are anticipated with rising inflation concerns. This strengthens the dollar, making U.S. equities more attractive than fixed-income securities. 📈 Investment Implications: The election results signal a potential economic policy shift favoring domestic, cyclical, and growth-oriented sectors. In this environment, investors might find more opportunities in equities over fixed income, especially in sectors benefiting from economic expansion and reduced regulatory constraints. This post is for informational purposes, not investment advice. 

How Have Historical Tariff Announcements Affected The Stock Market Historically, tariff announcements have often caused significant volatility in the stock market, as they introduce uncertainty about global trade relationships, corporate earnings, and economic growth. Here are a few notable examples of how past tariff-related events have impacted the markets: 1. Smoot-Hawley Tariff Act (1930) What Happened: The U.S. imposed high tariffs on over 20,000 imported goods in an effort to protect domestic industries during the Great Depression. Market Reaction: The act is widely believed to have exacerbated the Great Depression by triggering retaliatory tariffs from other countries, reducing global trade. The stock market continued its downward spiral, with the Dow Jones losing nearly 90% of its value from its 1929 peak by 1932. 2. Steel and Aluminum Tariffs (2018) What Happened: In March 2018, President Trump announced tariffs of 25% on steel and 10% on aluminum imports. Market Reaction: The stock market initially dropped sharply due to fears of a trade war but later stabilised. However, specific sectors like manufacturing and agriculture faced prolonged pressure due to higher input costs and retaliatory tariffs from trading partners like China and the EU. 3. U.S.-China Trade War (2018–2019) What Happened: The U.S. imposed multiple rounds of tariffs on Chinese goods, prompting retaliatory measures from China. Market Reaction: Markets experienced heightened volatility throughout the trade war. For example: . In May 2019, when additional tariffs were announced, the Dow Jones fell over 600 points in a single day. . Tech stocks were hit particularly hard due to concerns about supply chain disruptions and reduced demand in China. . By late 2019, partial agreements (e.g., "Phase One" deal) helped markets recover. 4. Tariffs on Mexico (2019) What Happened: President Trump threatened tariffs on Mexican imports unless Mexico took action to curb illegal immigration. Market Reaction: The Dow fell nearly 1,000 points over several days as investors feared disruptions to North American trade. Markets rebounded after the tariffs were called off following negotiations. Key Takeaways from Historical Trends Short-Term Volatility: Markets typically react negatively to tariff announcements due to uncertainty about their economic impact. Sector-Specific Impacts: Industries reliant on global supply chains—such as technology, manufacturing, and agriculture—are often hit hardest. Long-Term Effects Depend on Retaliation: If trading partners impose countermeasures, the economic impact can deepen, prolonging market instability. Safe-Haven Assets Rise: Gold and U.S. Treasury bonds tend to rally during tariff-induced market turmoil as investors seek safer investments. While historical patterns suggest that markets often recover after initial shocks, prolonged or widespread trade disputes can lead to lasting economic consequences.

📢 New FEDS paper with Ben Knox: “Stagflationary Stock Returns” 🔗 https://lnkd.in/gZ3P8yya How do markets interpret inflation surprises? We show that when inflation comes in above expectations: – Nominal cash flows are expected to stagnate – The equity risk premium rises – Real yields do not increase → Result: falling stock prices In other words, markets treat inflation as a supply (cost) shock, not a demand boom. A useful parallel: the “Liberation Day” tariffs—a textbook negative supply shock: – Inflation expectations ↑ – Real yields ↓ – Risk premiums ↑ – Profit expectations ↓ That’s exactly the pattern we observe, on average, after upside inflation surprises. This runs counter to the conventional view that inflation reflects overheating. Instead, markets—like households and firms—appear to interpret inflation as cost-driven, not a sign of excess demand. This reframes how inflation shocks affect asset prices and risk premia. It also sheds light on sectoral dynamics: Firms with low market power—and limited ability to pass through costs—are hit hardest. Firms with high markups hold up better. Analyst earnings expectations adjust accordingly. Zooming out, our findings align with a macro environment where: – The supply curve is flat – The demand curve is steep → Inflation responds to supply → Output responds to demand This perspective also prompts a reconsideration of past disinflationary episodes, including the post-GFC period. If inflation is largely supply-driven, then disinflation may reflect positive supply shocks, not just persistent demand weakness. That would help explain low inflation without strong growth. What supports this view? 🔹 Globalization and the China shock flattened the supply curve, reducing price sensitivity to domestic demand. 🔹 High aggregate market power steepens the demand curve—low demand elasticity means inflation responds more strongly to supply shocks. Bottom line: Markets interpret inflation surprises as stagflationary—not as signs of overheating, but as a mix of higher risk premiaand weaker real cash flow expectations. This challenges standard demand-based narratives of inflation, with implications for both policy and asset pricing models.

A comprehensive study (recently published) by Laure de Batz and Evžen Kočenda analyzed how financial markets react when listed companies disclose financial crimes like fraud or insider trading. The research combined data from 111 studies spanning over three decades and looked at 32,500 instances of financial crime. It found that while the general belief is that stock prices drop significantly when such crimes are revealed, the actual impact is often exaggerated in published studies. Specifically, most prior research reported that stock prices fall sharply, with negative returns being three times larger than they should be due to publication bias (where studies with bigger impacts are more likely to be published). After adjusting for this bias, the study showed that stock prices decline by an average of -0.5% per day over the event window when a financial crime is disclosed, totalling around -2.1% over the full period studied. This is more in line with the reactions to other corporate scandals like regulatory violations. The analysis also revealed that accounting frauds and financial crimes in the U.S., where enforcement is stricter and more transparent, see larger drops in stock prices. For instance, big scandals like Enron or WorldCom led to severe market punishments and significant loss of shareholder wealth. On the other hand, less severe crimes or those committed in countries with different legal systems, like civil law countries in Europe, may not trigger as harsh reactions. The implications are significant for both investors and regulators. Understanding that the real market reaction is smaller than previously thought is important for enforcing securities laws more effectively. The study suggests that market responses, which can include reputational damage, can act as an additional way to enforce regulations—essentially, the "name and shame" tactic works by deterring companies from breaking the law through fear of losing investor trust and facing higher costs in the future. This helps protect investors and keeps the market efficient and trustworthy.

***Endogenous Liquidity Crises***   Why are financial markets so prone to liquidity crises and crashes? It is now well established that a large fraction of large price jumps (say, 4-σ events at the 1 min time scale, or major daily moves) cannot be explained by significant news. These jumps seem to be rather the result of endogenous feedback loops that lead to liquidity seizures. The memory of most spectacular ones is still vivid, such as the infamous S&P500 flash crash of May 6, 2010.   These events have triggered a large amount of controversy, in particular in the general press, pointing fingers at electronic markets and high frequency traders. However, financial markets have always been unstable. For example on May 28, 1962, the US stock market suffered a flash crash of severity similar to the that of May 6, 2010. This happened with good old market makers and, obviously, no HFT. Upon closer scrutiny one finds that the frequency of large price moves is remarkably stable over time, once rescaled by volatility.   A plausible general scenario is that of destabilising feedback loops resulting in "micro" liquidity breakdown. Consider for example the classic Glosten–Milgrom model relating liquidity to adverse selection. When liquidity providers believe that the quantity of information revealed by trades exceeds some threshold, there is no longer any value of the bid–ask spread that allows them to break even—liquidity vanishes! Whether real or perceived, the risk of adverse selection is detrimental to liquidity. This creates a clear amplification channel that can lead to liquidity crises.   Such a scenario, that was fleshed out and studied in a paper with Antoine Fosset (and more recently revisited by Guillaume Maitrier) is, we believe, at the heart of the excess volatility puzzle. Volatility is a high frequency, microstructural phenomenon that propagates to low frequencies – until price is a factor two away from value, at which point stabilizing, mean-reversion forces set in, exactly as anticipated by Fischer Black.      https://lnkd.in/ea467ceC Figure: alpha is the strength of the volatility/cancellation feedback, beta is the inverse memory time of the feedback. Red region: liquidity crises are inevitable. Blue region: stable order book dynamics.

Most financial disasters happen because we try to model a turbulent fluid using the physics of a vacuum. If you look at the standard econometric toolkit—Geometric Brownian Motion or GARCH—you are looking at a system that assumes independence, continuity, and infinite capacity. You are effectively assuming that the market is a gas of non-interacting particles. But anyone who has traded through a liquidation break or a flash crash knows that the market has viscosity, it has resonance, and it hits hard walls. In Chapter 4 of Kinetic Markets, we strip away the regression models and derive the actual "Five-Term Template" for the time evolution of price (∂p/∂t). This is the constitutive equation of market motion, and it reveals exactly why the Black-Scholes framework fractures during a crisis. Every price move is the vector sum of five distinct forces: ∂p/∂t = D + F(X) + C(X) + ν(∇X) + ξ(t) 1. Drift (D): The baseline tendency of Fundamental Value. This is the potential energy that pulls price toward equilibrium. In a quiet market, this laminar flow dominates. 2. Feedback (F): The Endogenous Response of the system to its own state. This is reflexivity—margin calls, stop-losses, and trend-following. It is the non-linear term that drives super-exponential growth and generates "Fat Tails." 3. Constraint (C): The Boundary Conditions of regulatory capital and leverage limits. When these boundaries bind, the system creates discontinuities—the price doesn't slide; it gaps. 4. Friction (ν): The Dissipative Force of liquidity and arbitrage that consumes variance. Viscosity is what stabilizes the flow. 5. Shock (ξ): The Stochastic Forcing term representing exogenous news. The "Model Risk" in your portfolio comes from setting the wrong terms to zero. Black-Scholes posits a world where Feedback (F), Constraints (C), and Friction (ν) are all zero. It works in the laminar regime because it describes a frictionless fluid. But when liquidity evaporates (ν→0) or reflexivity spikes (F→∞), the equation remains valid, but the model becomes catastrophic. We spend a lot of time analyzing the Shock (ξ)—the news. We spend far less time measuring the Friction (ν) that dampens it or the Feedback (F) that amplifies it. Looking at the current market regime, which of the five terms do you think is currently dominating price discovery? Kinetic Markets https://amzn.eu/d/1bEVvN6 #QuantitativeFinance #MarketMicrostructure #SystemicRisk #KineticMarkets #PhysicsOfFinance

📣 After the “liberation day” announcement, what next for investors? 🦏 The collective anxiety within the investment community shouldn’t be confused with the idea that “reciprocal tariffs” are already priced in. The material underperformance of US stocks year-to-date has just removed the hubris around “US exceptionalism”. Tariffs are a “grey rhino” in investment markets 🤷♂️ Policy uncertainty is now structurally elevated. Uncertainty is a feature of the system, not a bug. That’s because of possible further negotiation and retaliation. And – more prosaically – the system moving further away from the rules based global order of the 1990s and 2000s. What kind of trade regime follows next is uncertain 📊 The economic effects are hard to gauge. The impact of US tariffs will vary by economy. Global growth is set to be materially lower than previously expected. In the case of the US, some economic models suggest we could see growth drop below 1% later in 2025, or in early 2026. US inflation could peak at close to 4%. This leaves the Fed in a bind 🇺🇸 But the aura of US growth invincibility has been broken. So far, hard data on GDP and profits has held up. The issue for financial markets is more about faltering investor confidence 📉 US stocks have cheapened, with the S&P 500 trading on 20.5x and the NASDAQ on 25x. But policy uncertainty and the stagflation-lite news lowers both profits expectations and market ratings. And sticky inflation postpones a pre-emptive easing by the Fed, which could’ve acted as a stock market shock absorber 🗺️ Global investors will need to consider international effects. The impact of the tariffs, of course. And also : 1️⃣ The emergence of new domestic policy initiatives, especially in Europe and China. 2️⃣ The dollar – which is weakening on tariff news… historically helpful for rest of world stock markets. 3️⃣ How trade flows and supply chains can adjust or divert. And any new relative winners 🔭 Our AM house view has emphasised two distinct scenarios since the end of 2024. A baseline scenario of “spinning around”. That meant that elevated policy uncertainty would drive higher market volatility, with adverse – though mild – consequences for growth, profits, and inflation. And a second, alternative, downside scenario where growth and profits “topple over” 🎯 This has proved to be a good framework to understand investment markets this year 🔚 High policy uncertainty continues to point to an agile approach to managing portfolios. That means diversification and a selective approach that builds portfolio resilience across geographies, asset classes, and factors For more, check out the latest note from the AM team 📝 🔔 Follow to stay up to date on global macro and investment views #tariffs #economy #investing #markets #usa #liberationday #stocks #emergingmarkets

We're currently experiencing a rare and concerning phenomenon in the financial markets: a bear steepening of the yield curve. This occurs when long-dated yields, such as those on 10-year bonds, increase at a faster rate than short-term yields. The yield curve has begun to bear steepen, suggesting a shallower upcoming cycle of Fed rate cuts with a new nominal equilibrium rate projected at 4%. This adjustment reflects a growing belief that the U.S. economy is structurally capable of enduring higher interest rates without detrimental long-term effects. However, the implications of a bear steepening yield curve are multifaceted. Such movements typically lead to higher long-term yields, which can quickly tighten financial conditions in the real economy. Financial markets are taking note of these changes. As we face this current shift, questions arise about the U.S. economy's capacity to manage a 4.00% nominal interest rate as the new normal. It appears that a very expansive fiscal policy is currently cushioning the economy, but whether this support will suffice in the longer term remains an open question. Will history repeat itself, or will this time indeed be different? #finance #yieldcurve #interestrates #economicshift

The Fed Acts, the Market Reacts: The Fed lowered rates last month by 50bps & the 10-year UST rose by 50bps. SOFR was 5.35% the day the Fed lowered rates on September 18 vs. today’s SOFR rate of 4.85%. 10yr UST was 3.70% on September 18, today it is 4.20% SOFR/10-yr UST is exactly 100 bps steeper since the Fed lowered rates by 50. 8 quick take-aways: 1. Bigger NIM = Bigger bank earnings 2. Leveraged unhedged investors who benefit from steeper yield curve benefit 3. Long duration takes a hit 4. Floating rate asset continue to perform well as credit metrics improve 5. Credit spreads not impacted, as earnings/economy remains robust 6. Government funding costs higher since Fed lowered rates (net increase in issuance + higher treasury rates) 7. Home sales/refinancing slows as mortgages are predominately a long-term fixed-rate market 8. The Fed controls Fed Funds, The Market controls longer term rates (unless the Fed manipulates through QE) which they are unlikely to do at this juncture

Markets this year have suffered - and withstood - three sizeable shocks. First, from DeepSeek; second, from the imposition of tariffs and likelihood of more to come; third, from the growing consensus that the Fed will find it difficult to make further cuts in interest rates. Why, then, has the overall market response been so positive? Remember also that if some of the answer revolves around the strength of the US consumer, you need to explain why US credit and equities have been underperforming not outperforming. The evidence of US exceptionalism is everywhere except, suddenly, in markets. Nor can you simply say that there is relief that tariffs are "less awful than feared" when the best performance of all has come from gold. In a new and detailed note for Satori Insights I've tried to provide some answers - which range from real yields to term premia to swings in central bank liquidity - and more importantly to draw conclusions about how long these effects may last. https://lnkd.in/d9Eaygcg