A Decisive Outcome

The November 5 Election Finally Arrived

The election was conducted across the nation without major disruptions.  The presidential results came in timely and without controversy.   President-elect Trump earned a decisive victory, and Vice President Harris conceded.  No civil unrest.  While voters weighed all the various factors regarding candidate traits and economic, cultural, social, and security issues, it is the space that we engage in — the economy – that itself made for a stiff headwind for the incumbent party to remain in the White House.  The driving economic issue was not unemployment, which is historically low, but inflation.

In President Trump’s first term, inflation rose 1.93% on average per year; in President Biden’s term, it has risen an average of 4.83%.¹US Inflation Calculator. “Current US Inflation Rates: 2000-2024.” US Inflation Calculator | Easily Calculate How the Buying Power of the U.S. Dollar Has Changed From 1913 to 2023. Get Inflation Rates and U.S. Inflation News., 10 Oct. 2024, www.usinflationcalculator.com/inflation/current-inflation-rates.  While the inflation rate has come down from a peak of 9.1% in June 2022²Rugaber, Christopher. “U.S. Inflation at 9.1 Percent, A Record High.” PBS News, 13 July 2022, www.pbs.org/newshour/economy/u-s-inflation-at-9-1-percent-a-record-high. to its current rate of 2.4%,³Cox, Jeff “Inflation rate hit 2.4% in September, topping expectations; jobless claims highest since August 2023”, CNBC, 10 Oct. 2024, https://www.cnbc.com/2024/10/10/cpi-inflation-september-2024.html. prices are up substantially from four years ago for most goods, especially food, and rents remain stubbornly high in most markets across the country. Although wages have been outpacing inflation since the spring of 2023, there is still a cumulative gap between wage growth and inflation since inflation started surging in early 2021; since January 2021, prices have been up 20% while wages have been up 17.4%.⁴Foster, Sarah. “Study: Americans’ Pay Hasn’t Fully Recovered From Inflation. Will It Ever?” Bankrate, 19 Sept. 2024, www.bankrate.com/banking/federal-reserve/wage-to-inflation-index/#:~:text=In%20Bankrate’s%202023%20index%2C%20Americans,Bankrate’s%20index%20for%202024%20found.  There is a lot of economic stress for average-earning Americans, and there is not much citizens can do about it other than to express their frustration at the ballot box, which many did on November 5 (and earlier, as mail-in and early voting surged this time).

Not only is President Trump heading back into office, but the Senate will be under Republican control, and it is looking likely that the House will remain under Republican control, too, although by a slim margin.  On September 30, Team Hewins held a pre-election webinar with our friend Apollo Lupescu from Dimensional Fund Advisors. Apollo showed no discernible pattern in market returns regarding whether the White House was under Republican or Democratic control.  There have been bull and bear markets under both.  He also showed the record when one party controls the presidency and both houses of Congress.  As mentioned in the webinar, based on data from 1926 to 2020, Democrats were in full control for 34 of those years and Republicans for just 13 years; remarkably, the annual return of the S&P 500 in both circumstances was exactly the same, to the hundredth decimal point – 14.52%!

You can access the webinar recording here. 

So, What Are Markets Factoring Into Prices With the Coming Second Trump Administration?

On Wednesday, the equity markets had their best day in two years, with the S&P rising 2.53% to an all-time high.  Smaller companies really took off, with the Russell 2000 rising 5.84%.⁵Li, Yun, and Jesse Pound. “Dow Soars 1,500 Points to Record High in Best Day Since 2022 After Trump Election Win: Live Updates.” CNBC, 6 Nov. 2024, www.cnbc.com/2024/11/05/stock-market-today-live-updates.html. While markets were probably relieved that the outcome was clean and decisive, other factors may have also fueled the market surge.

It now seems likely that the 2017 tax cuts, which are currently set to expire at the end of 2025, will become permanent.  It also appears that businesses will benefit from regulatory reforms.  Smaller, more domestically oriented companies will face fewer challenges around international trade to the extent trade tensions heat up again as they did during Trump’s first term.  There is also an expectation that mergers and acquisitions will increase as anti-trust enforcement is expected to be less stringent than it has been under Biden.

We’ll have to see how new tariffs may be implemented and their impact on global trade, inflation, and profit margins. Stock prices rise with earnings, and for now, the Trump victory has enhanced confidence in better earnings. Meanwhile, the technology story based on breakthroughs in artificial intelligence continues to unfold and drive optimism about earnings.

Not only did markets face the election last week, but there was also a Federal Reserve meeting on Thursday.  The Fed did cut overnight rates by 25 bps based mainly on slowing job growth.⁶Cox, Jeff. “Federal Reserve Cuts Interest Rates by a Quarter Point.” CNBC, 7 Nov. 2024, www.cnbc.com/2024/11/07/fed-rate-decision-november-2024.html. The Fed cuts have also encouraged stock investors, but the bond market is another story as the 10-year Treasury yield has risen from 3.65% in mid-September to 4.4%.⁷Source: US Treasury. Daily Treasury Par Yield Curve Rates. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024. Accessed November 11th 2024.

Why would longer-term rates rise if the Fed is cutting overnight rates?   The bond market is likely reflecting concerns that rising deficits will persist, along with fears of a rebound in inflation.  Eventually, higher yields can depress stock market valuations.   If the new Administration and Congress can convey a convincing sense that deficit reduction is a real priority, then longer-term yields could stabilize.  The bond market is a very effective check on the system, and fiscal policy has no choice but to respect it, given the size of the national debt and our annual deficits.

Change – both political and technological — is here.  There will be winners and losers.   Trying to make specific bets on who those winners may be is unwise.   It is essential to cover the bases across the global stock and bond markets as we do through our well-diversified program.  The political rhetoric will continue as the tables turn.  In the coming months, Republicans who have been highlighting economic challenges will now focus on the positives, and the Democrats will shift to emphasizing the negatives. Tune out the noise.  The markets themselves are an excellent information filter.  Although President-elect Trump’s brash style and often sweeping pronouncements may cause spikes in volatility, markets do have years of experience sorting through it all.    

We’ve all endured another terribly exhausting and highly emotional election cycle. May we move forward and engage in endeavors that each of us finds meaningful and gratifying. 

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