Encouraging Economic Signals Boost Market Gains

The dog days of summer are upon us, bringing scorching temperatures and a heated political and economic landscape, presenting both opportunities and challenges for investors. The attempted assassination of former President Donald Trump was a deeply troubling incident that has reverberated throughout the political sphere. In its wake, Trump’s standing in the polls has notably increased, positioning him as a formidable contender for the 2024 election.

Given the potential for a Trump presidency, it is crucial to understand his proposed economic policies. We have summarized these policies using the acronym RITT: Regulation, Immigration, Tariffs and Taxes. Trump has advocated for looser regulation, stricter immigration policies, higher tariffs and lower tax rates. These fundamental policies could have broad implications for the economy and markets. Looser regulations could stimulate business growth, but may raise environmental and consumer protection concerns. Stricter immigration policies might tighten labor markets, particularly in sectors like engineering and healthcare, where immigrants comprise a significant portion of advanced degree holders. Higher tariffs could protect some domestic industries, but may increase costs for consumers and businesses relying on imports. Both a tighter labor market and higher prices on imported goods have the potential to reignite inflation. Lower tax rates could boost short-term economic growth, but if they are not accompanied by a reduction in spending, they have the potential to add even more debt to the US balance sheet – a risk to the long-term fiscal viability of our country. Trump has already hinted at addressing entitlement programs like Social Security and Medicare, which we believe is a necessary step to keep our burgeoning debt from spiraling out of control.. While politically sensitive and unpopular, tackling these issues could be more feasible for a second term president. Many economists agree that the current entitlement system faces long-term sustainability challenges, though there is debate about the best approach to reform.

The markets are rallying due to a potent combination: the prospect of a Trump presidency and favorable economic data. June’s Consumer Price Index (CPI) dropped 0.1%, which has not happened since 2020. Core CPI also fell, while the job market showed signs of cooling with rising unemployment, easing wage growth and slowing growth in the payroll numbers. This confluence of factors may be a signal that the economic temperature is dropping, potentially setting the stage for interest rate cuts. Federal Reserve (Fed) Chairman Powell’s recent comment that further labor market cooling might be “undesirable” is being interpreted as a hint that rate cuts could come sooner than previously expected. This potential shift has already caused significant market rotation, with big tech stocks selling off and smaller companies, value stocks and other sectors finally gaining more ground.

The bond market’s current inverted yield curve, now extending even to municipal bonds, presents a compelling opportunity for investors. With yields at 15-year highs, we are advising clients, especially retirees and income-focused individuals, to consider shifting some of their assets from cash to bonds. This strategy secures attractive yields and positions portfolios for potential appreciation if rates decline. While money market funds offer tempting rates around 5%, these could drop rapidly with Fed rate cuts. Longer-term bonds, including tax-free municipals for taxable accounts, allow investors to lock in today’s high rates for an extended period. This approach provides both steady income and growth potential, even with the 10-year Treasury yielding less than its 3-month counterpart. We believe that it is crucial to act now to benefit from these historically high yields.

While the outcome of the November election remains uncertain, the stock market continues to show encouraging signs. The broadening rally is a healthy development, and historically, markets tend to thrive when the Fed cuts rates. With potential rate cuts on the horizon, we see significant opportunities, particularly in small-cap and mid-cap stocks. At The Wealth Alliance, we remain vigilant and adaptive, continuously aligning our strategies with evolving market conditions. We encourage you to contact your financial advisor with any questions about your investments.