Post-Election Market Update

The 2024 Presidential election season has come to an end with Donald Trump elected as the 47th President of the United States. Many polls had indicated the election was too tight to call, whereas a wider gap in favor of Trump had opened up in betting markets. Ultimately, President-elect Trump won the crucial swing states. Additionally, Republicans have control of the Senate and have a narrow majority in the House of Representatives.

U.S. Stocks

In the week leading up to the election, U.S. stocks were down. In fact, the S&P 500 declined 0.91% in the month of October, and the tech-heavy Nasdaq slipped 0.49% in the month. However, the markets had a positive reaction following the election, likely influenced by a result that was quick and clear; investors often appreciate clarity over uncertainty.

Equities rallied and Treasury yields increased on the Wednesday following the election. The S&P 500 gained 2.5% on November 6^th, and smaller-cap stocks jumped 5.8% that day. While stocks were positive, bond prices went in the opposite direction as longer-term interest rates moved sharply higher, causing the core bond index to fall 0.74%.

Also similar to the post-election days of 2016, foreign stocks severely underperformed with emerging markets losing 0.6% and developed international stocks falling 1.3% likely reflecting concerns about changing geopolitics. A stronger U.S. dollar has been a headwind for foreign stock returns – the Dollar Index (DXY) increased more than 3% during October alone. Foreign stock returns were meaningfully better when viewed in their local currencies, such as the MSCI ACWI ex.-U.S., which was down in October by just 1.8% in local currency terms but nearly 5% in U.S. dollar terms.

Looking ahead, it remains to be seen which of President Trump’s policies will be implemented, as well as the timing and extent. He campaigned on extending lower personal income taxes, lower corporate tax rates, higher tariffs, stricter immigration controls, and deregulation. The risk of higher tariffs and focus on the domestic economy played out in the day following the election (i.e., foreign stocks posting losses versus U.S. small caps rising sharply). However, determining how his proposed agenda will take form will require ongoing monitoring, as will the Fed’s reaction as data shifts.

As we turn our focus to the investment opportunity within S&P 500 companies, as of writing roughly 70% of these companies have reported earnings for the third quarter, and according to financial data company FactSet Research, 75% of companies have reported earnings above consensus estimates, which is in-line with the 10-year average. We watch earnings growth closely, because it is a critical factor in stock valuations (or the stock price per unit of earnings). U.S. large-cap stock valuations are currently elevated, suggesting that the market may already be pricing-in strong future earnings.

Predicting future valuation levels in the short-term is notoriously difficult, but historical trends indicate that high valuations can imply lower equity returns over subsequent years if earnings growth does not materialize. Therefore, we are focusing on monitoring the fundamentals of the stock market and assessing continued earnings reports.

Source: FactSet. Data as of 11/1/2024

Source: Bloomberg LP. Data as of 10/31/2024.

U.S. Economy, Interest Rates, and Inflation

At the broader economic level, economic data continues to suggest that a recession has yet to take hold and may be avoided, or at least delayed. After believing the Fed would need to cut rates by more than their latest forecast, by the end of the month the movement in the bond market was implying the Fed would need to make fewer rate cuts.

During October, the two-year Treasury yield rose from 3.66% to 4.16% and the 10-Year Treasury rose from 3.81% to 4.28%, bringing prices down on both ends of the yield curve. Some believe the so-called “Trump trade” played a role in higher bond rates as the anticipation of a second Trump presidency could result in higher inflation (such as from tariffs on imports). We believe this could have been an incremental factor, but we also believe higher rates had more to do with the favorable economic data.

The labor market appears relatively stable as it continues to normalize in the years following the pandemic but there are some blemishes worth monitoring. We have not yet seen any signs to suggest that the labor market is crumbling, but it has softened from the strong post-COVID conditions. A strong labor market is generally a driver of inflation, while weakness could indicate potential for a slowing economy or even recession. The Fed’s dual-mandate policy (persistently low inflation and maximum employment) aims to balance these two considerations, with the goal of achieving a “soft-landing” that avoids both recession and too-high inflation.

As for inflation, our current outlook is that the primary forces that influence prices are in relatively good balance. Specifically, we are referring to the supply and demand of money. With today’s backdrop, we would not expect a meaningful change in the immediate term unless one of these factors shifts. Our view has been that the flood of money supply via government stimulus during the pandemic significantly increased the supply of money. (We measure money supply using M2, a government metric that includes liquid retail assets such as currency, savings and checking accounts, etc.).

But this stimulus was met by an equally strong demand for money as the economy was locked down, which helps to explain why inflation did not show up until the economy reopened. The reopening of the economy led to a flood of money pouring back into the economy, and this surging demand pushed prices higher, a trend exacerbated by supply chain shortfalls.

Today, year-over-year money supply is growing modestly (2.6%), while money demand is slightly elevated when compared to pre-pandemic levels. If these current conditions persist, we believe inflation may remain range-bound in/around current levels for the immediate term. Looking ahead, however, we think there are pressures that could contribute to higher inflation.  These include growing national fiscal deficits, tariffs, strict border measures, and deglobalization.

Summary

The economy is big and complex, and while the presidential outcome will certainly influence particular areas, its overall impact may not be as significant as many expect. Our focus is now on assessing how policy implementation will intersect with the economy and financial markets, and the investment decisions we make will continue to be guided by our analysis of these factors.

We remain optimistic that the investment approach we take is designed to help our clients, whatever their own views may be, achieve their long-term financial goals. Our teams are in regular communication about the economic and investment outlook, and we welcome any questions you may have for us. Please don’t hesitate to reach out to your advisor.

Important Disclosure

This report is solely for informational purposes and shall not constitute an offer to sell or the solicitation to buy securities. The opinions expressed herein represent the current views of the author(s) at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such.

The information presented in this report has been developed internally and/or obtained from sources believed to be reliable; however, Litman Gregory Wealth Management, LLC (“Litman Gregory” or “LGWM”) does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated.

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