A cinematic sequel to “Clash of the Titans” could hit Wall Street in 2025. The epic battle, which mirrors the battle between Zeus and Hades in Greek mythology, could pit stock and bond markets against each other as they decide which force will be unleashed. What will the U.S. economy look like in the coming months and years? Following President-elect Donald Trump's victory on November 5th, stock and bond markets have clearly responded differently to the news. Initially, the stock market soared, but bonds were sold off and interest rates rose. Both markets expected outcomes that were in direct opposition to each other. In the case of the stock market's strong initial reaction, traders had expected a range of pro-business policies, including larger corporate tax cuts and widespread deregulation. The incoming administration has indicated that it plans to enact the following: Extend the Tax Cuts and Jobs Act enacted during the Trump administration's first term Lower the corporate tax rate from the current 21% to 15% 10,000 in states Eliminates the dollar cap and provides additional tax breaks for tips, Social Security income, and overtime pay. Regulatory rollback is also a top priority for the Biden administration, with a particular focus on: Reducing environmental regulations across many industries Reducing capital requirements for banks Opening up oil drilling on federal lands and offshore To cryptocurrencies Adopting an Industry-Friendly Approach After last week's stock market pullback, the S&P 500 is up nearly 24% in 2024, and the Nasdaq Composite Index is up 26% year-to-date. Bond Market Concerns Meanwhile, the bond market appears to be fighting rather than celebrating some of the proposals from the return of the Trump administration. The bond market, like other inflation indicators, is showing some concern about the idea that tax cuts will pay for themselves. There are also concerns that if the Trump tax cuts are extended, the annual deficit and total national debt will increase significantly. In addition, President Trump has called for flat tariffs of up to 20% on imported goods, and there is a proposal to impose tariffs of 60% on products from China. Many economists and the bond market worry that imposing broad, rather than targeted, tariffs will be inherently inflationary. They would raise the cost of goods and services for nearly every American household. Mass deportations can cause both inflation and recession, or in other words, stagflation. This move would shrink the available workforce and drive up wages, while also reducing the consumer base. That would reduce not only consumption but also federal tax revenue. Like Hydra, the economic impact of such draconian policies will be significant and difficult to defeat once implemented. The president-elect is also keen to create a Department of Government Efficiency (DOGE), led by the world's richest men, Elon Musk and Vivek Ramaswamy. Musk and Ramaswamy will reportedly identify ways to reduce federal spending and eliminate waste, fraud and abuse within the system, suggesting there are $2 trillion in potential savings. This represents almost one-third of total government spending in 2024. About $1 trillion of the budget goes to discretionary items other than defense. About $3.8 trillion has been allocated to essential programs, including Social Security, Medicare and Medicaid, according to the Congressional Budget Office. If $2 trillion were quickly cut from the budget, the negative effects would be far-reaching. Taken together, the contradictory nature of all these policies creates a rather confusing economic outlook. Bond markets are becoming more concerned about the incoming administration's policy mix, which many economists say could lead to harmful factors such as inflation, recession and potential financial instability. The stock market's track record as a predictive tool for assessing an economy's future growth prospects is somewhat spotty. This is not the case in the bond market. I'd like to focus on the less-heralded of these two huge markets to determine what will happen over the next few months. Like Zeus in “Clash of the Titans,” many people view the stock market more favorably. But in this earthly realm, the bond market disguised as Hades may be a more powerful and real enemy. The outcome of this battle will likely be eternal. I think Hades might have the upper hand this time. — CNBC contributor Ron Insana is the CEO of artificial intelligence fintech company iFi.AI.
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