A record-breaking 56.4% of Americans think the stock market will rise over the next 12 months, according to the latest Conference Board Consumer Survey. This figure has doubled in just two years, signaling the highest level of optimism ever recorded.
In November, the gap between those expecting stock prices to climb and those predicting declines hit a historic 35%. This is happening while the S&P 500 approaches a massive milestone: its first annual gain of over 30% since 1997.
Trump’s return could shake up everything
President Donald Trump is set to reclaim the White House, and Wall Street is already holding its breath. His return could upend the balance between emerging-market stocks and bonds, which have been a heated battleground under Joe Biden.
During Biden’s first three years, dollar-denominated emerging-market bonds outperformed stocks. This year, they’re neck and neck: bonds have gained 8.4%, while stocks have delivered 9%. But bonds have managed all this with half the volatility of equities. High-yield sovereign bonds? Up a stunning 15%.
Trump’s trade policies are the wildcard. Jeff Grills, head of US cross-asset and emerging-markets debt at Aegon Asset Management, says Trump’s tariffs could be a game-changer. “If he imposes tariffs on Mexican and Chinese imports, stocks will take a hit, while bonds could shine,” Grills explained. But if Trump’s tariff strategy is more about negotiating leverage, it could push equities ahead of bonds.
The market is already showing signs of a split. Since early November, the Bloomberg Emerging Market Dollar Debt Index has been climbing, while the MSCI Emerging Market Equity Index has dropped 3.7%.
Chinese stocks, a major part of the equity index, have plunged 8% since Trump’s win, dragging down the entire sector. Meanwhile, bonds have stayed steady, offering a refuge for nervous investors.
Emerging markets caught in the crossfire
Emerging-market stocks started the year on a high. Everyone expected Federal Reserve rate cuts and Chinese economic stimulus. But since October, it’s been a different story. Stocks in this category have dropped nearly 10% as traders brace for Trump’s potential tariffs.
The stakes are high for countries like China, South Korea, India, and Taiwan, which make up 73% of the emerging-market equity index. In simpler terms, people want safe bets, and emerging-market bonds have been delivering just that.
Unlike the equity index, which is heavily exposed to China, the bond gauge is more balanced. China accounts for only 10% of the bond index, compared to its heavy weighting in stocks.
Emerging-market debt has gained steady traction, thanks to solid yields and less exposure to geopolitical drama. High-yield bonds, especially those from riskier sovereigns, are up 15%—a major win for investors who stuck with fixed income.
The dollar’s strength and investor exodus
The strong dollar is creating headaches for emerging-market equities. While it might help Asian exporters compete globally, it’s putting pressure on equity valuations. Investors yanked $1.8 billion out of emerging-market equity funds in the week ending November 27. That was seven straight weeks of outflows, according to data from Bank of America and EPFR Global.
Here’s the thing: the yield premium on emerging-market bonds over US Treasuries has narrowed to more than 100 basis points below its five-year average. To put it plainly, there’s less room for bonds to grow.
And sure, the S&P 500 may be soaring, but the bigger picture tells a different story. Investors are watching Trump’s next moves closely. Will tariffs derail stocks completely? Will bonds continue to be the safer option? No one can tell you for sure.
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