Markets React to Election Results Amid Economic Shifts
The 2024 election has come to a conclusion, with Donald Trump securing a decisive victory for the presidency and the Republican Party gaining control of both the Senate and House, albeit by a slim margin in the House. This outcome sparked a notable stock market rally, with the S&P 500, the Dow Jones Industrial Average and the Russell 2000 posting gains of approximately 3%, 4%, and 5%, respectively, in the days following the election from 11/04/2024-11/15/2024. Interestingly, the S&P 500’s 3.5% jump in the first week after the election marked the second-highest post-election rally in history, trailing only the 2020 rally.
While markets have responded positively in the short term, the reaction highlighted the divergence between stocks and bonds. Historically, Federal Reserve (Fed) rate cuts have led to falling rates and rising bond values. However, bond values declined alongside falling interest rates after the Fed’s 25 bps cut in early November, with the 10-year Treasury yield rising from 3.6% on 09/17/2024 to 4.4% on 11/22/24. This unusual dynamic has created both challenges and opportunities for income oriented investors, who are now seeing more attractive yields in the bond market.
The Trump administration’s pro-growth agenda, emphasizing tax cuts and deregulation, has fueled optimism in the stock market. Trump’s focus on corporate tax reductions and regulatory rollbacks is seen as a boon for industries like banks, energy and technology. However, some of these policies could also be inflationary. Tighter immigration policies could lead to a reduced labor force and, consequently, higher wages, potentially increasing inflationary pressures. Additionally, proposed tariffs of up to 60% on Chinese imports and 25% on imports from other nations could further drive up costs for consumers as well. Lower taxes without spending cuts could increase the deficit and our national debt, further driving up interest rates.
These inflation concerns have tempered expectations for future Fed rate cuts. While markets initially anticipated six cuts in 2024, that forecast has now been revised to three. The Fed is closely monitoring inflation metrics, with core PCE—a preferred measure of inflation—showing signs of leveling off. Concerns remain about the possibility of inflation reigniting if rates are cut too aggressively, evoking parallels to the policy missteps of the 1970s.
Amid this complex environment, stock market participation continues to broaden, with small-cap stocks seeing a resurgence. The Russell 2000 has posted impressive gains, yet its three-year return remains slightly negative (-0.5%) (11/01/2021 to 11/26/2024). This presents opportunities for investors as small-cap stocks, which are more closely tied to economic growth, are still trading at relatively-attractive valuations compared to large-cap stocks. In addition, removing the “Magnificent Seven” technology giants from the S&P 500 drops the P/E ratio from 27 to a P/E of 21.4 as of 11/26/2024, more in line with the 10 year historical average of 18.3, suggesting that the broader market is not wildly overvalued.
Geopolitical risks remain a key concern, particularly ongoing conflicts in Ukraine and the Middle East. While these events are difficult to predict, they underscore the importance of maintaining diversified portfolios and focusing on long-term investment strategies.
With 2025 just weeks away, we are also focused on end-of-year tax planning, specifically centered around tax-loss harvesting. While 2024 has offered fewer losses to offset gains, carry-forward losses from prior years may still be available to mitigate tax liabilities. Planning with your accountant and reviewing your tax situation can ensure you are well-positioned for the year ahead.
If you have any questions about market trends or how the recent election results may impact your investment strategy, we are here to help.
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