Elon Musk cutting $2 trn in US spend is negative for markets: Chris Wood

Elon Musk, Tesla, spending cut in Trump administration: Elon Musk's plans to cut US spending by $2 trillion, as he said recently, under Donald Trump 2.0 administration will boost US dollar and be a negative for stock markets, said Christopher Wood, global head of equity strategy at Jefferies in a television interview on Thursday.

 

Closer home, the fall in Indian stocks, especially the mid-and small-caps, he said, is healthy and called it a 'natural correction' after a sharp run.

 

The US government, meanwhile, had spent $6.75 trillion in fiscal year 2024 (October 2023 to September 2024) according to official figures from the US Treasury. In percentage terms, a $2 trillion cut, therefore, will shave off 32 per cent from this US government's annual spend. 

 

 

Musk, who is the chief executive officer at Tesla, has been appointed to co-head a new Department of Government Efficiency by the incumbent US president, Donald Trump. 

 

“Treasury bond market will sell-off, unless Musk does a surgery of the US administration and is able to pull off the $2 trillion cut. This will give a deflationary shock to the US economy and can lead to investors looking elsewhere. If Trump really champions such a policy, since it would mean cutting entitlements,” Wood said. 

 

He expects the strength the US dollar to last only in the short-term – till Donald Trump's inauguration in January 2025. However, from a stock market perspective, Wood believes, the rising bond yields pose a more serious threat, which the markets will not be able to ignore for long.

 

Bond yields

 

From a level of 3.6 per cent in mid-September 2024, the US bond yields have risen to 4.46 per cent now, a rise of nearly 28 per cent during this period. The risk for equities, according to Wood, is that at some point the stock market will not be able to ignore rising bond yields. 

 

“The other negative for equities is that the liquidity situation has begun to deteriorate at a time when valuations are at historic highs," Wood recently wrote in GREED & fear, his weekly note to investors.

 

There is growing evidence of liquidity tightening in the US, Wood said, which raises a near-term risk to equities, as is also suggested by Warren Buffett’s continuing selling at a time when the US stock market has reached a market capitalisation of 203 per cent of gross domestic product (GDP) and is trading at a near historic peak to sales.  

 

“At the macro level the growing liquidity pressure is shown in the continuing decline in the US M2 to GDP ratio. So far, US stocks have proved remarkably resilient in the face of rising bond yields. Still at some point, the stock market will have to react negatively to rising bond yields, which may be another reason aside from peak valuations, (and the reason) why the 'legendary investor from Omaha' has been selling,” Wood wrote in GREED & fear.

 

Back home, the reserve Bank of India (RBI), Wood said, seems to be in no hurry to cut interest rates despite the global developments.

 

“The Indian stock market has had a healthy correction of late, most particularly in the small to mid-cap space. This is in the context of a July-September 2024 quarter (Q2-FY25) earnings season, which has seen the biggest earnings downgrades since early 2020. This seems to reflect the impact of a cyclical slowdown, and is healthy as it has impacted the most expensive part of the market,” he wrote.