Let’s start by looking at how financial markets reacted to the Republicans' clean sweep of the Presidency, Senate, and House.

The US stock market rallied, with the S&P 500 index crossing 6,000 for the first time. Spooked by anticipated tariffs, stock markets around the world fell, while the MSCI USA/World Ratio surged to a record high. Since 2008, US stocks have outperformed the rest of the world. Today, they account for 65.21% of the market-cap-weighted MSCI ACWI index, while the US economy represents only 25.95% of global GDP.

Accordingly, Emerging Markets declined relative to Developed Markets.

In US Stock Market Sectors, Financials (cyclical) and Consumer Staples (defensive) stand out.

In aggregate, Cyclical Sectors have outperformed Defensive ones, with the ratio reaching its highest reading ever.

Among Thematic Indices, the Blockchain Economy surged, while Clean Energy declined.

Further segmenting the market, Growth stocks have outpaced Value stocks. Also, Small-cap stocks outperformed Large-cap stocks, a trend often seen with rising inflation expectations.

Finally, the US Dollar strengthened against other major currencies.

While the S&P 500 hits new all-time highs, stock market volatility has declined.

Bond Yield Credit Spreads are at their lowest level since 1995, indicating low default risk and ample market liquidity.

Stock valuations are at extremes, with the Shiller PE Ratio hitting 38.25 and the Buffett Indicator crossing 200% for the first time.

The big question on everyone’s mind lately has been, "Why are long-term yields rising?" - especially while the Fed is cutting rates.

According to Mohamed El-Erian and the All-in Podcast hosts, several factors contribute to this trend.

The U.S. government's historic debt levels lead to over $1 trillion in annual Interest Payments. The maturing debt and the ever widening budget deficit require substantial bond issuance. However, traditional buyers, like China, are reducing their holdings of U.S. debt, prompting the government to offer higher yields to attract new investors, thereby increasing long-term yields further.

The Committee for a Responsible Federal Budget (CRFB) projects that President Trump’s plan will further increase the national Debt-to-GDP Ratio. The proposed tax cuts and spending increases are estimated to add $7.75 trillion in debt from FY 2026 to 2035, raising the ratio from 102% to 143% by 2035.

Additionally, surprisingly strong economic growth is driving yields higher. Real GDP grew at an annual rate of 2.8% in Q3 2024. According to the money market model, the growth increases demand for money, which further raises interest rates.

Lastly, Inflation Expectations are rising, driven by fiscal challenges and potential Fed missteps. Legendary investors Paul Tudor Jones and Stanley Druckenmiller warn that unchecked spending, tax cuts, and rising debt could fuel inflation. Jones points to mounting debt and deficits as pressures on the Treasury market, while Druckenmiller criticizes both the Fed’s recent easing and its reliance on “forward guidance,” advocating instead for a data-driven approach. Druckenmiller highlights strong economic indicators - such as high equity prices, record highs in gold, and narrow credit spreads - as signs that the economy may not be as constrained as the Fed assumes. He argues that easing policy in such a growth environment could misalign with actual market needs, potentially sparking an inflationary surge. In response, both investors have adjusted their portfolios, positioning themselves to benefit from assets that traditionally perform well in inflationary environments, including short positions in bonds.

Historically, nations struggling to service their debt have often turned to inflation by buying their own bonds and increasing the Money Supply - a strategy Ray Dalio discussed extensively.

While US stocks have shown resilience, the rate increase has hurt Bonds.

According to the CRFB, rising Yields and Budget Deficits mean government spending on “Net Interest” will soon exceed Medicaid, Defense, and Medicare.

Higher yields are also raising borrowing costs for consumers and businesses, affecting spending and growth. Mortgages are particularly impacted, making homeownership less affordable and cooling housing demand.

As Charlie Bilello illustrates, the US housing market remains in hibernation. With affordability at record lows, fewer homes are selling today than at any point since 2010.

With long-term yields rising and short-term yields falling, the Yield Curve has uninverted.

According to Neil Howe, on average, the economy enters a recession 5.2 months after the curve's uninversion.

The jobs report from the Bureau of Labor Statistics showed an increase of 254,000 in total nonfarm payroll employment in September, reflecting strong job growth. October saw minimal change (+12,000), yet caution is warranted.
A notable discrepancy exists between the CES (Current Employment Statistics) and CPS (Current Population Survey) reports, with the latter showing weaker trends, raising concerns about the labor market's true strength. Additionally, job gains are often revised downward near the end of the Business Cycle, suggesting initial figures may not hold up.

Despite a slight unemployment drop (from 4.3% back down to 4.1%), the Sahm Rule, a recession indicator, was triggered in July.

Trump sees tariffs as the solution to restoring American economic strength, tackling the Budget Deficit, and boosting tax revenues without burdening citizens. In the Joe Rogan interview he said "the most beautiful word... in the dictionary today… is the word tariff." He argues that tariffs protect domestic jobs and industries by making foreign goods more costly, while also creating a steady revenue stream that could reduce reliance on income taxes, shifting the financial burden to foreign companies seeking access to U.S. markets.

The CRFB estimates that Trump’s tariffs could raise Customs Revenue to $450 billion by 2035. However, CRFB’s Marc Goldwein explains that this gain could be offset by reductions in other tax sources due to slower economic growth. Tariffs can raise consumer prices, increasing inflation, and potentially reduce GDP output by 1–1.5%, especially if they prompt retaliatory tariffs, which would hurt U.S. exports. This debate underscores the trade-off between short-term gains for domestic industries and broader economic costs. While proponents claim that tariffs support local jobs and industries, most economists argue that tariffs ultimately hinder economic specialization, raise consumer costs, increase inflation, and invite retaliatory measures.

Overall, tariffs align with Neil Howe’s “Fourth Turning” theory, where nations prioritize resilience over global cooperation. This inward shift reflects a crisis-era need to bolster national foundations, even at the cost of economic efficiency and international goodwill - heightening geopolitical tensions.

In his book Principles for Navigating Big Debt Crises (p. 31), Ray Dalio compares today's wealth inequality to the 1930s, a period of severe social and economic challenges. The wealthiest 0.1% now hold as much wealth as the bottom 90%. History shows that economic downturns intensify frustrations, increase polarization, and drive populist movements on both sides, fueling calls for redistributive policies.

Sven Henrich illustrates how rising Federal Debt has transferred wealth to the top 1%, leaving the bottom 50% behind.

Since the 1980s, the hours needed to buy the S&P 500 have increased, as wages have failed to keep up with stock prices. Today, wealth and income are increasingly determined by assets rather than labor.

Darius Dale, founder of 42 Macro, expects income inequality to decline during the current Fourth Turning, a generational crisis marked by social, political, and economic pressures that drive populist reforms. Dale argues that a broken social contract has left middle- and lower-income Americans struggling under corporate-friendly policies, globalization, and central bank actions that favor the wealthy. As more Americans feel left behind, populist sentiment is growing across the political spectrum. Dale anticipates that these pressures will drive “Robin Hood” policies, incrementally redistributing wealth from the affluent to those most affected by these shifts, bringing an era of populist, incrementally socialist policies aimed at narrowing the wealth gap and alleviating economic suffering.

Both Gold and Bitcoin have had strong years, with Bitcoin up 80% and Gold up 30%. Since January 2024, when the iShares Bitcoin ETF (IBIT) launched, demand has surged. The fund now holds over 449,000 coins and $34 billion in assets, exceeding even the iShares Gold counterpart (IAU).

Throughout 2023 and 2024, Bitcoin has outperformed other cryptocurrencies, now making up 59% of total crypto market cap.

This heatmap shows the market share and this year's price movements across all major cryptocurrencies.

Written by this year's Nobel laureates in economics, James Robinson and Daron Acemoglu, Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full Terms of use here.