The stock market is an emotional place. Just look at how repeated record highs for the Dow industrials and a tag-along advance by the S&P 500 followed a knee-jerk overnight plunge when Donald Trump’s election win first materialized. Right up until the election, the stock market had built in a status-quo rally, believing Hillary Clinton would win.
The bond market reacted, too — prices dropped and U.S. Treasury benchmark yields, which drive interest rates, climbed to their highest in a year on expectations for greater inflation and new debt issuance in a new administration. The gap between yields on higher-risk corporate bonds and lower-risk government bonds narrowed as investors scooped up riskier bonds for their higher payout. But these relationships were already taking shape, in advance of the final election result.
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