Investors bet Trump will boost spending and cut taxes, Minnesota analysts say

Investors on Wednesday bet that President-elect Trump and the Republican-controlled Congress will raise government spending and ease regulations on banks and energy producers.

The yield on the benchmark 10-year Treasury note reached its highest level in eight months, a sign that investors think the government will be issuing a lot of debt to pay for Trump's infrastructure priorities and other programs.

"The market is saying we are probably going to have more debt, maybe bigger budget deficits to finance some of this infrastructure spending and maybe some other initiatives and that could be inflationary down the road," said David Joy, chief investment strategist at Minneapolis-based Ameriprise.

Amid the bond sell-off, investors purchased stocks on U.S. exchanges, arresting a sell-off that started in overseas markets as presidential vote results came in late Tuesday night. U.S. stocks had fallen in eight of the previous 10 trading sessions.

"Everybody was talking of a 1,000-point sell-off in the market, but my opinion was you weren't going to get that because the market has already sold off into this vote," said Craig Johnson, senior technical market strategist for Piper Jaffray in Minneapolis.

The Dow Jones industrial average closed up 1.5 percent on Wednesday and the broad-market S&P 500 index was up 1.1 percent.

"This really set up to be one of those scenarios where you are selling on the rumor that Trump was going to win," Johnson said. "And now you are buying on the fact that you have this big change of ideology happening in Washington."

For several weeks, however, investors sold shares on days when it appeared Trump was moving ahead of Hillary Clinton in the race. The most recent stock sell-off intensified on Oct. 28, the day FBI Director James Comey said the agency was reviewing new information tied to the Clinton e-mail probe he had previously said was closed. And late Tuesday, as Trump's victory became clear, investors in Asia sold shares on the expectation that he would follow through on vows to seek new trade agreements and impose tariffs.

But U.S. investors focused on the likelihood that Trump would boost the government deficit with income tax cuts and infrastructure spending, corporate tax cuts and an attack on red tape. Materials, energy and financial stocks rose while shares in staple-goods companies fell on the expectation of trade constraints. For instance, shares in food giant General Mills, based in Golden Valley, fell 1.5 percent.

"Investors have looked at this and said, 'At least at the sector level, I can make the case for improved conditions for a number of different groups' and that's what you see reflected here," Joy said. "The financial sector up strongly leading the way, followed by health care, industrials, materials, energy. These are parts of the economy that would benefit if his policies get enacted into law."

Carol Schleif, chief investment officer of Minneapolis-based Abbot Downing, was in New York watching the election results roll in and the market sell-off overseas. She said the reaction leveled off when Trump appeared at his election night party. "He came across as humble and inclusive and conciliatory as opposed to bombastic and revenge-seeking," Schleif said.

Many market watchers expect that over the next several weeks the market could be more volatile as it reacts to more news coming out of Washington on members of Trump's cabinet and presidential priorities.

"Now the market will react to what policies are going to be changed in Washington in the first 100 days," Johnson said.

Schleif thinks things seemed to have paused in the run-up to the election and expects that fourth-quarter economic numbers might be a little soft in what has otherwise been a modestly-growing economy. She said that markets and businesses hate a vacuum and that the sooner policy becomes clear the firmer markets and business can react.

"Historically a single party top-to-bottom — markets would assume a lot can get done. This one will all depend on how cordial the relationship will be between the White House and Congress," Schleif said.

Staff writer Evan Ramstad contributed to this report.

Patrick Kennedy • 612-673-7926