Now that stock markets and the Federal Reserve expect inflationary pressures to ease, investors have two other risks to consider.
The U.S. government’s fiscal debt levels are the biggest ongoing risks. In the last four years, the Democrats spent heavily on funding the war and paying interest on debt. Markets widely expect the incoming Republicans will continue to increase U.S. debt. In the last few weeks, yields on the U.S. Treasury notes rose significantly.
Bond investors should brace for treasury yields to top 5.0%. ETF investors should avoid the iShares 7-10 Year Treasury Bond ETF (IEF). Until markets get clarity on the uncertainties about the economy and monetary policy, bonds are unattractive investments.
Global trade is the second major concern. Markets expect the U.S. to impose significant tariffs on China. It also expects such trade barriers in Europe and Canada. Already, European automotive stocks are falling. Mercedes-Benz Group (MBGAF), BMW (BAMXF), and Volkswagen (VWAGY) are examples of stocks that fell throughout the last year.
Currencies are also anticipating tariffs on the way. The Canadian dollar (FXC) fell to a four-year low, finding support near $0.70. Experts are forecasting the looney to fall toward $0.66. The Euro (FXE) and Yen (FXY) also fell sharply since September. Markets are betting that the Fed will slow or delay the next interest rate cuts.
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