2024 November Market Update

Domestic stocks posted a strong November, catalyzed by increased clarity in the political environment.  Traders had hedged all potential election outcomes, and the decisive result, unifying the Presidency and Senate, allowed for a swift unwinding of the positioning and triggered a rally in perceived winners during the next administration.  Over the last 50 years, stocks have posted positive returns in every non-recessionary post-election through the Inauguration Day period, regardless of the political outcome.*  This cycle’s “Trump Trade” saw stocks rally on the potential for deregulation and lower corporate taxes, somewhat tempered by the possibility of tariffs and skepticism of prospective Presidential cabinet members.

As long-term investors, we caution against reading too much into these short-term, election-related price movements.  We expect continued volatility in stocks most exposed to major policy proposals that may not reflect the fundamental operations of their businesses.  For example, as the threat of trade tariffs looms, the stocks of companies most reliant on imports from Mexico and Canada have come under pressure.  It remains uncertain if these tariffs will ever be implemented or how long they might remain in effect.  The sell-off may have created a buying opportunity should the tariffs prove less impactful or blunt than feared. A fair amount of negative outcomes have already been discounted even if they are enacted as advertised. At the macroeconomic level, recall that over Trump’s first term, initial moves in the dollar, oil prices, and interest rates ultimately reversed.

Other sweeping industry group moves – such as those in Healthcare, Defense, Financials, and Electric Vehicle stocks – have been significantly influenced by the public rhetoric and track records of prospective cabinet members. These moves are a result of the market's anticipation of potential policy changes and their impact on these sectors.  Not only does there remain significant uncertainty around the appointments themselves, but, as 2016 showed, many early policy proclamations proved “more bark than bite.”  Such anticipatory trading can create opportunity for the patient individual investor.

We continue to focus on the strength of corporate earnings and resilience of the economy.  Macroeconomic data read positively, while corporate earnings suggest a long runway for AI-related productivity gains and firm consumer spending.  Headline valuations remain stretched, however, as witnessed over the past few years, strong returns can still be recognized from earnings growth even if valuations are near their peak.  Consider that forward-looking price-to-earnings ratios are about the same today as they were four years ago despite significant gains for the S&P 500 in the interim. Furthermore, excluding the largest ten stocks in the Index reveals a much more constructive valuation backdrop for the “average” stock.

Earnings expectations remain strong - consensus forecasts call for 10%+ growth for next year and 2026 - despite considerable uncertainty about the near-term impact of potential policies.  Remember that the stock market and domestic economy, while related, are not the same, and prospective policies designed to help one can often hurt the other.  Lower corporate tax rates could potentially be offset by passthroughs from tariffs and elevated labor costs (driven by changes in immigration patterns).  Bond markets have already signaled fears of inflationary pressures from proposed policies with the rise in long-term yields since the election.  The 10-year treasury yield is 60 basis points higher since the Fed started their rate cutting cycle!

While bond investors may not have enjoyed the post-election period as much as those more leveraged to stocks, the upward rate move has likely extended the opportunity to “lock-in” attractive yields.  Short-term interest rates (which drive money market and cash yields) are already noticeably lower than just a few months ago, and investors, where appropriate, should consider the merits of adding duration to fixed income portfolios.  Rates could continue to move higher should inflationary pressures intensify, but higher starting yields offer a bigger buffer to downside scenarios than the near record-low rates of a few years ago.

We hope everyone had a great Thanksgiving and is enjoying the start of the holiday season.  Although the year is winding down, December is always busy at the Wise Investor Group. Please let us know how we can help you square all your financial “to-do’s” as we complete tax-efficient trading strategies, ensure required distributions and gifting initiatives are satisfied, and update financial plans for the coming year. We wish you a happy and healthy December and look forward to catching up soon!