Election Driven Rally Pushes US Equities Higher
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Weekly Market Recap for November 8th
Stocks traded higher this week, with most gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. Small caps led the gains, with the Growth and High Beta factors trading higher. In contrast, the Equal-Weight, Momentum, and Low Volatility factors underperformed the broad index. Sectors with exposure to stronger U.S. growth and deregulation, such as Financials, Industrials, and Energy, traded higher, while defensive sectors lagged. Utilities and Staples traded lower, and Real Estate and Health Care saw only slight increases. Bond performance was mixed: corporate bonds rose as credit spreads tightened, but Treasury bonds fell as yields surged higher. International stocks underperformed U.S. stocks as the U.S. dollar strengthened. As forecasted in the 10/25 Market Update, measures of implied volatility plummeted. The VIX plunged to a near 3-month low, and the MOVE Index showed a significant drop in expected yield volatility. Oil prices climbed as OPEC members extended their production cuts.
S&P 500 Index (Last 12 Months)
S&P 500 Technical Composite (Last 24 Months)
CBOE Volatility Index (VIX)
Market Cycle (November)
Election Results
The Republicans won control of the White House and Senate, while the House remains undecided. Early market returns show investors expect pro-growth and reflation policies from the next administration. Banks (deregulation), small caps (pro-growth policies), transports (reshoring creates a manufacturing renaissance), and bitcoin (pro-cryptocurrency) all surged higher. In contrast, Treasury bonds (federal deficit spending and inflation risk), EV automakers and clean energy (ending tax subsidies), and retailers (tariffs) all traded lower. It is important to note that this early market reaction is largely narrative-driven and speculative, based on a combination of the previous Trump administration and the current campaign’s messaging. The administration’s ability to implement these policies will be determined by the outcome in the House, which could either act as a roadblock or an accelerant. While the market’s initial reaction and reliance on the 2016 playbook is understandable, keeping the broader context in mind is crucial: the economic backdrop has shifted considerably since then.
Market Reaction to Election Results
FOMC
The Fed held its November meeting this week, and as expected, the central bank cut interest rates by -0.25%. The market’s focus has already shifted to the path forward and the debate over the neutral rate. It is one big expectations game, and investor expectations have changed dramatically since the September meeting. On 9/17, the market forecasted a 2.8% Fed funds rate by the end of 2025. Less than two months later, the estimate has climbed to 3.7%. For context, the Fed forecasted 3.4% by the end of 2025 at the September meeting. Initially, the market was more dovish than the Fed, but now it’s more hawkish. Why? Economic data, such as unemployment and Q3 GDP growth, indicate the economy remains solid. Donald Trump won the presidency, and the prospect of a unified Congress and White House could catalyze his pro-growth, reflationary policies. The market is pushing back against the Fed’s early rate-cutting actions. Our view is unchanged: the Fed will continue to lower interest rates, but this cycle will be a mid-cycle regime with fewer total rate cuts.
Fed Funds Futures (Now vs September)
Q3 2024 GDP Growth
In Q3 2024, U.S. GDP grew by +2.8%, a slowdown from Q2's +3.0% but still above the 2010s trend. The Q3 GDP growth primarily reflected increases in consumer spending on goods and services, exports, business investment in computer equipment (likely semiconductors), and federal government spending. Compared to Q2, the -0.2% slowdown in Q3 GDP was primarily due to a downturn in private inventory investment and a more significant decrease in residential investment. Increases in exports, consumer spending, and federal government spending partially offset these.
The main themes remained similar to Q2:
Strong consumer spending
Weak residential investment in both multi-family and single-family homes
Nonresidential investment is driven by equipment as structures decrease (i.e., structures and data centers are already built and are now being filled with equipment and semiconductors)
Federal and state/local government investment and spending
Our broader view is unchanged: the economy is cooling due to higher rates, but it's a normalization rather than a recession.
Contribution to 2Q24 Real GDP Growth (% q/q)
Labor Market Holds Steady Despite Challenges
Unemployment remained steady at 4.1% in October, with nonfarm payrolls increasing by +12,000. Health Care (+52,000) and Government (+40,000) continued to lead job gains, while Manufacturing (-46,000) lost jobs due to Boeing strikes and Professional & Business Services (-47,000) declined because of a drop in temp jobs. October’s hurricanes and strikes make it hard to gauge the labor market, but the overall trends remain consistent. The labor market is softening compared to recent years, as labor supply rises faster than demand. A large portion of the rise in unemployment earlier in the year was due to re-entrants, new entrants, and temporary layoffs rather than permanent job losses. While there are reasons to be cautious, the growing Not in Labor Force group suggests the risk of unemployment reaching 6% is decreasing. More retirements among those aged 55 and older are lowering the labor force participation rate, which we expect to keep the labor market tight. Our view is unchanged: the labor market is finding a new equilibrium rather than deteriorating.
Unemployment Holds Steady at 4.1%
Look Ahead
The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end. Looking toward early 2025, we expect seasonality, strong market breadth, and mechanical buying as event-driven volatility subsides to support the market. While current valuations are high, history shows they are unreliable for timing the market—animal spirits can keep valuations elevated longer than fundamentals suggest. We remain cautious about early 2025 and underlying pressures, but there is little reason to battle the market or stay on the sidelines in the near term.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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