Since the U.S. economy began to recover from the pandemic, market veteran Ed Yardeni has been beating the drum that Wall Street is driven by a new “Roaring 20s.”
Now that Donald Trump returns to the White House, Republicans retake the Senate, and the House likely remains in Republican control, a decade of bullish returns not only looks more likely, it could last longer.
“In fact, it increases the likelihood that the good times will last through the end of the decade and possibly into the 2030s,” Yardeni, the president of Yardeni Research, wrote in a note on Wednesday.
This decade is already off to a good start. Aside from a bearish year in 2022 when the Federal Reserve began an aggressive rate-hiking cycle, the S&P 500 has delivered double-digit returns every year and is already up nearly 26% so far in 2024.
This came after markets had their best week in a year, surging following Trump’s decisive victory, with a Republican victory looking likely. The S&P 500 ended the week up 4.7% Dow Jones Industrial Average gained 4.6% Nasdaq rose 5.7% and the Russell 2000 small-cap index rose 8.6% as investors bet on lower taxes and deregulation to further stimulate the economy.
“We stick with our investment recommendation of “Stay Home” instead of “Go Global,” wrote Yardeni. “In other words, overweight the US in global equity portfolios.”
Of course, the Roaring ’20s ended a century ago with the stock market crash of 1929, which triggered the Great Depression that lasted into the 1930s.
And Yardeni, for his part, sees different scenarios in this century. However, his assessment of a new “Roaring 20s” is the most likely at 50% probability, while the probability of a 1990s-style stock market “meltdown” is 20%, and the probability of a 1970s-style geopolitical crisis is 20% of a possible US debt crisis is 30%.
“But we are considering increasing the likelihood of the Roaring 2020s scenario, as a looser regulatory environment and lower corporate and income taxes under Trump 2.0 are expected to boost investment and drive productivity-led economic growth,” he added.
Yardeni also warns of “Bond vigilantes“Yields are rising as the outlook for US debt and deficits continues to deteriorate. Trump’s tax cuts and tariffs are also viewed as inflationary, limiting the Fed’s ability to further cut interest rates.
But Scott Bessent, considered a possible Treasury secretary under Trump, has noted that lower energy prices and deregulation are disinflationary and could offset the potential inflationary impact of higher tariffs.
“We sympathize with that view, but we would also add productivity improvements,” Yardeni said. “A tight labor market and continued investment in new technologies such as AI, robotics and automation will help keep unit labor costs and therefore inflation under control.”
Others on Wall Street have also highlighted the potential for another Roaring 20s. including analysts from UBS who said before the election that there was a 50% chance of a booming economic cycle.
However, Dan Ivascyn, chief investment officer at bond giant PIMCO, was more cautious about the impact of Trump’s policies on the economy and financial markets.
He told that Financially Just On Friday, he said the economy could “overheat” under a second Trump administration, threatening interest rate cuts from the Fed and the stock market.
“It’s not as simple and easy as a one-sided reflationary trade, which risk assets should be happy about,” Ivascyn said FT. “You should be a little careful what you wish for.”
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