Published November 15, 2024
Sifting through the post-election results: stock indexes have been big winners, cryptocurrencies have gone “to the moon”, interest rates have continued to move higher. Within the stock indexes, banks, energy, and consumer discretionary sectors have been the beneficiaries of the “Trump Trade” while typically defensive sectors have not participated. Below, we post an assortment of analyses and outlooks to provide what markets are wrestling with currently.
First, the overview from Blaine Rollins:
“Now is the time to enjoy the market lift as the election tailwinds and the growing seasonal trade lifts prices into the first quarter. Then you will need to have your game plan in place for how to navigate the new administration. How high will tariffs go? How many deportations will occur? How many Treasuries will need to be issued for the tax cuts and increased government spending? Plenty of uncertainty now with questions that need to be answered in the future to help us make estimates for future levels of inflation and interest rates. The FOMC cut the Fed Funds rate by another 25 basis points last week, but future rate cut expectations have been sliced significantly since Tuesday’s election. As the Fed Chairman told us at the presser, we can’t assume anything right now. We just have to wait and see what the 47th White House does.”
Certainly corporate earnings have been supportive of the rally, beating estimates handily for the 5th straight quarter while the earnings growth outlook is very elevated due in part to lower interest rates:
And a pro-business administration could dramatically increase mergers and acquisitions activity, another feather in the cap of stock market bulls (from the WSJ):
“Business leaders expect lighter regulation and lower taxes to help accelerate deal activity.
Donald Trump’s convincing election win Tuesday and lower interest rates provide “powerful elixirs” for private equity that are likely to accelerate acquisition activity while boosting investor returns, trends that stand to benefit Carlyle Group, Chief Executive Harvey Schwartz said Thursday.
The election’s conclusion helps remove uncertainty from the market when it comes to “strategy, committing capital and making decisions,” Schwartz said during an earnings call with securities analysts. The results at the polls might induce more executives to move ahead with selling and acquiring businesses, he said.”
But there’s uncertainty around the tariffs that will be imposed:
“Anyone who imports goods should plan for the worst and hope to be positively surprised…
Trump has vowed to impose massive new tariffs, eyeing a duty of 20% on all foreign goods and 60% or higher on goods coming from China. On the campaign trail, he also dropped threats of even-higher rates on specific countries and products.
He faces relatively few constraints in imposing his promised tariffs and doesn’t need to consult with Congress. A 1977 law gives him authority to impose duties in cases of an “unusual and extraordinary threat” to national security, foreign policy, or the US economy. Alternatively, he could use other legal provisions he invoked in his first term to raise some tariffs. Those require a public comment period, which add a delay.
Some Trump advisers have suggested he might use the threat of tariffs as a negotiating tactic with allies and rivals alike and back off the notion of imposing them across the board. Others have suggested that Trump is truly serious this time about rewriting the rules of international trade, no matter the consequences. He’s also pointed to tariffs as a way to help pay for the big tax cuts he’s promised, though economists argue they won’t raise nearly enough money. In either case, tariffs are expected to play an even larger role in his second term.
“We advise readers to take the president-elect’s threats of tariffs seriously if not literally,” Wells Fargo & Co. economists Jay Bryson and Michael Pugliese said in a note to clients Wednesday.”
Here’s how Morgan Stanley views the impact of tariffs:
While reducing corporate tax rates would add handsomely to company bottom lines:
One fly in the ointment – rising interest rates
Powell’s Fed this week pulled back on future interest rate cut expectations given economic strength and uncertainty around policy changes. Rates have risen strongly in recent weeks, giving up all their gains which were built on the expectation of a rapid Fed rate reduction campaign.
It seems very reasonable that Trump will want rates to come down to light a fire under housing demand, et al. Powell would likely dig in further on his caution around the prospect of inflation re-igniting. It is expected that Trump will want to replace Powell. Powell says Trump can’t legally do that. The fight between Trump and Fed Chair Powell will certainly be a market disrupter.
But which of these actions can Trump implement directly (aka quickly)? And which will require Congressional approval? (And will Congress be as amenable to Trump’s policies as the market initially believed?). Here’s a cheat sheet:
As a result of these crosswinds, stocks have this week given back a significant chunk of the post-election gains as the post-election euphoria quickly fades.
Though JP Morgan reminds us that what we expect to happen to stocks given an Administration’s stance is very often quite wrong. Here’s one example:
“Investors often consider how they should position portfolios based on election outcomes. However, it is very difficult to construct reliable investment strategies based on different policy implications.
For example, President Trump campaigned vigorously to support the traditional energy industry during his presidency. Yet the S&P 500 Energy index was down -40% under his term, while the S&P 500 Global Clean Energy index was up 275%. On the other hand, Biden campaigned on scaling back fossil fuels and galvanizing renewables and successfully passed a $369Bn commitment with the Inflation Reduction Act. Yet the S&P 500 Energy index has more than doubled and the S&P 500 Global Clean Energy index is down over 50% so far in his term. Macro forces ultimately drove markets: varying supply/demand and interest rate environments mattered more than any policies or intentions by the White House.”
Bottom line: it could be a bumpier ride than stock investors originally thought (except maybe for bitcoin which is only relying on more-favorable regulation – seemingly a given under Trump).
Market Update
After the post-election euphoria last week, investors looked to a continuation of the rally alongside the outcome of a Fed meeting this week. The “Trump Trade” continued Monday with Elon Musk’s Tesla surging, banks flowing upward, bitcoin continuing to rocket higher, and the U.S. dollar adding to its two-month lift. While the S&P and Nasdaq were flat on the day, small-cap stocks added another +1.5% to their stellar week prior total. Stocks halted their rise Tuesday as bond yields clipped higher. The bond market was closed Monday for Veterans Day. The jump in yields gave investors pause as rising interest rates typically discount stock values. Rates are rising on a confluence of concerns: a possible uptick in inflation, rising government deficits, and stronger economic growth. Another flat day for the major indexes Wednesday while bond yields kept rising and small caps fell once again. Bitcoin hit a record high as optimism around looser cryptocurrency regulation continues to fuel buyers. Wednesday’s inflation report on consumer prices came in as expected. Stocks slipped back a bit Thursday with a -0.5% dip. Fed Chair Powell’s comments that the future interest rate path would be “bumpy” with “no hurry to lower rates” led investors to decrease their optimism for a December Fed rate cut. The slip accelerated Friday with the Nasdaq tumbling more than -2%. A weak outlook from semiconductor equipment maker Applied Materials hurt that sector.
Stocks gave back roughly half of their election week gains as the post-election rally appeared to run out of steam. The S&P fell back -2.08% while the Nasdaq 100 (QQQ) slid -3.42%. Small-cap stocks fell -4.05%.
Warm wishes and until next week.