Market Reaction: Stocks Post New Highs Post Election
Monthly Market Summary
- The S&P 500 Index returned +6.0% but underperformed the Russell 2000 Index’s +11.1% return. All eleven S&P 500 sectors traded higher, with Consumer Discretionary and Financials gaining more than +10%. In contrast, defensive sectors, such as Health Care, Utilities, and Consumer Staples, underperformed the S&P 500.
- Corporate investment-grade bonds produced a +1.8% total return as Treasury yields declined, marginally outperforming corporate high-yield’s +1.6% total return.
- International stocks traded lower for a second consecutive month. The MSCI EAFE developed market stock index returned -0.3%, while the MSCI Emerging Market Index returned -2.7%.
Markets Set New All-Time Highs in November’s Post-Election Rally
The U.S. presidential election results fueled November’s stock market rally, as investors focused on the incoming administration’s policy agenda and its implications. The S&P 500 gained +6.0%, its biggest monthly return since November 2023.
The index traded above the key 6,000 level and set a new all-time high, bringing its year-to-date return to +27%. Smaller companies took center stage during the broad market rally, with the Russell 2000 surging +11.1% to set a record high.
In the bond market, Treasury yields rose after the election due to concerns about increased fiscal spending, tax cuts, and large fiscal deficits under the next administration.
However, later in the month, yields reversed lower, and bonds posted positive returns. With Republicans taking control of the White House, Senate, and House in January, the following section discusses key policy areas to watch, along with the potential market and economic impacts.
Key Policies to Watch in the Next Administration
Investors are monitoring two key areas: tax policy and trade.
The administration is expected to focus on extending the tax cuts passed during President Trump’s first term. This could stimulate economic growth and boost corporate profits, although it could widen the fiscal deficit.
On trade, the administration plans to use tariffs to advance U.S. interests in international affairs and renegotiate trade deals. However, in the near term, tariffs could disrupt supply chains, slow economic growth, and squeeze profit margins.
Other critical policies include immigration and deregulation. There are concerns that tariffs, stricter immigration policies, and expansionary fiscal policy could combine to keep inflation high. If so, the Federal Reserve might need to keep interest rates higher for longer.
Elsewhere, there is an expectation that deregulation could create new growth opportunities in the financial and energy sectors, while relaxed antitrust enforcement could lead to more mergers and acquisitions. Economic growth and corporate earnings will remain important long-term drivers, but in the short term, markets may be sensitive to shifting policy headlines as the new administration takes office.
Trump Wins: What it Means for Your Money
We are likely entering a period of familiar uncertainty. Former President Donald Trump's victory in Wisconsin early this morning clinched his victory and set the stage for a second term as the country's president.
Market Implications
So, what does this mean for the markets, the economy, and your money? Well, as we pointed out in last month's note heading into this week's election, long-term investment data since 1953 shows that markets tend to grow irrespective of the sitting president's party, with a $10,000 investment growing to over $2.1 million if invested continuously, compared to much lower returns if one invested only when Republican or Democratic administrations were in office.
This analysis highlights the benefit of sticking to a disciplined, long-term investment strategy instead of trying to time investments based on political cycles.
Economic Implications
Now, with respect to Trump's second term, the effects of his economic policies could have long-term implications on your savings and spending decisions, given the potential for higher inflation in the coming years and higher taxes once he's out of office.
How so?
First, Trump vowed to renew his trade war with China and begin imposing tariffs shortly after taking office. Although often discussed in geopolitical terms, tariffs on China's exports ultimately function as taxes on US consumers, which can lead to higher prices for goods consumed.
Effects of Tax Cuts
Second, Trump has proposed a host of tax cuts, including extending the 2017 Tax Cuts and Jobs Act (TCJA), eliminating income taxes on Social Security benefits, and reducing corporate tax rates.
Tax cuts provide extra disposable income for households. And when people have more money to spend, consumer demand for goods and services typically increases.
If this increased demand outpaces the economy's ability to supply these goods and services, it can lead to higher prices and contribute to inflation. This point is crucial because a combination of rising import costs, fiscal stimulus, and easy money policies from the Federal Reserve could stoke the embers of inflation.
Higher Taxes Down the Road
Finally, all these tax cuts need to be paid somehow.
As it stands, the US government is spending more than it brings in by the tune of $1.8 trillion in 2024. According to a study by Wharton, this deficit could balloon to $5.8 trillion over the next ten years.
And so, while spending cuts are one way to tackle future deficits, policymakers will likely find ways to raise taxes down the road to cover these debts.
The Big Takeaway
We are headed into a period of familiar uncertainty as it relates to economic policy.
So then, proactive financial planning is prudent now more than ever because higher inflation and higher taxes later are likely a reality we'll all face.
Loose fiscal and monetary policy, along with a renewed trade war, could lead to higher levels of inflation and a rising cost of living over the long term.
At the same time, ballooning government deficits cannot be ignored indefinitely, so spending cuts and higher taxes will be necessary to address the current plight.
Now's the Time to Reevaluate Your Financial Plan
Therefore, reevaluating potentially overly optimistic inflation assumptions in your retirement plan could help you mitigate the effects of a rising cost of living and avoid savings/spending misalignment down the road.
At the same time, tax planning is essential now more than ever because regardless of which tax bracket you're in now, there's a good chance that years from now, your retirement distributions could be facing higher tax rates.
That's why, while your portfolio may grow steadily in this changing political environment, now's the time to begin planning for higher costs and evaluating strategies to keep more of your savings when it's time to take distributions.
As we navigate this period of economic uncertainty, it's crucial to actively review and adjust your financial plan. Doing so not only prepares you for potential inflation and tax changes but also positions your wealth to capitalize on opportunities that arise during fluctuating economic cycles.
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What Does a 50 Basis Point Cut Really Mean?
Did you know that in a significant move, the Federal Reserve just reduced the fed funds rate by 50 basis points, bringing it down to a range of 4.75 – 5.00%?
This is the first cut since the early days of 2020, marking an end to what has been the most intense period of rate hikes in over four decades.
Why such a decisive cut, you might wonder?
Well, while some might see this as a signal of concern from the Fed about the economy, let’s dig a little deeper. Despite a slight uptick in unemployment and a slowdown in job growth, most indicators suggest that the economy is still expanding.
Even Fed Chief Powell has echoed this sentiment, providing a bit of reassurance to investors. He's betting on a smooth adjustment—a so-called economic soft landing.
Powell’s Perspective: Playing It Safe?
During his latest press conference, Powell maintained that the economy is "in good shape."
But, he hinted that this larger rate cut is more of a precaution—an "insurance" against potential slowdowns. It’s about reinforcing the job market now while it’s strong, not when layoffs start hitting the news.
Think of it as a balancing act. If the Fed waits too long or moves too slowly, it risks a recession. Move too quickly, and it could overheat the economy, sparking inflation. It’s a delicate line to walk, and today, everyone's tuned into how they're managing it.
Market Reactions and Long-term Strategies
Either way, the response from the markets has been generally positive given that it finally got what it’s wanted for years: a Fed Pivot.
Indeed, with profit growth stabilizing, inflation moderating, and interest rates either stable or falling, conditions are ripe for investment. Just this September, both the Dow and S&P 500 reached new heights, a reassuring move given the initial underestimation of inflation by the Fed.
Here’s a quick snapshot of the latest index performances:
- Dow Jones Industrial Average: 1.8% month-to-date, 12.3% year-to-date
- NASDAQ Composite: 2.7% MTD, 21.2% YTD
- S&P 500 Index: 2.0% MTD, 20.8% YTD
Now, it’s worth noting that while strong market performance can stir investor enthusiasm, it also brings with it the temptation for risk-taking. This is where a disciplined investment strategy comes into play.
You see, it’s not just about chasing returns; it’s about managing risks and ensuring you have a portfolio that balances both risks and returns.
The Big Takeaway
So, why should this matter to you?
Well, this situation underscores the critical lesson of diversification—not just in types of investments but also in understanding market movements and central bank strategies.
You see, while markets have rallied strongly this year, recent volatility is a stark reminder that market conditions can change on a whim, so it’s essential to be prepared and not take more risk than necessary.
That’s why, by diversifying your investments, you not only shield yourself from unforeseen market shifts but also position yourself to capitalize on various global opportunities. This kind of strategic positioning ensures that your portfolio captures potential gains while distributing risks, allowing you to focus on what truly matters.
So, as we think on the Fed's recent move, consider this: Is your investment portfolio as diversified as it should be, or are you relying too much on certain assets?
Remember, a disciplined investment strategy isn’t just about picking stocks—it’s about preparing for whatever the future holds while ensuring that your financial foundation is as solid as it can be.
From PE Ratios to Discounted Cash Flows – Which Valuation Method is Best?
Are your holding onto employer stock that’s over- or under-valued?
Well, you've likely tried to read reports, blog posts, or talked to colleagues about the value of your company's stock.
And so, when you're faced with evaluating whether to hold your company stock for the long run or cut your holdings, the road ahead can seem fraught with a number of complex choices.
But you know, getting the answer to your question about the value of your company stock is actually simpler than you think.
That's because when it comes down to it, there are two methods that professionals use to determine whether the price of a company's stock is fairly valued or not.
And that's the absolute valuation and relative valuation methods.
How do these approaches differ?
So, how do these approaches differ?
Well, an absolute valuation model like the Discounted Cash Flow (DCF) method looks at what's called a stock's intrinsic value.
This method forecasts expected future cash flows and adjusts for risk and time value of money—much like estimating all future earnings of a company and converting them into today's dollar value.
On the other hand, relative valuation methods involve comparing a company to its industry peers.
Here, what we're doing is using ratios such as Price-to-Earnings (P/E) so you can get a market-based perspective on whether what you're holding is cheap or expensive.
The Strategic Advantage of a Dual Valuation Approach
So, which one should you use when it comes to valuing your equity compensation?
Well, consider both.
Because here's the thing: if you're a tech professional receiving equity as part of your compensation, then understanding both absolute and relative valuation methods will empower you to make informed, nuanced investment choices.
For example, when looking at absolute valuations, what you're doing is isolating a stock's value based on its internal potential and risks. In other words, does the price of the stock reflect the company's future earnings potential?
In contrast, relative valuation situates a stock within the landscape of its peers, offering you a market-relative perspective on whether it's time to hold or sell. In other words, is the dollar of earnings you're paying for higher or lower compared to industry peers?
Why not just use one versus another?
And so, each method gives you a different lens to look through.
So then, why not use one versus another?
Well, by applying solely an absolute valuation approach, you're potentially at risk of evaluating your company's stock in a vacuum based on expected profits and risks.
However, by adding in relative valuation into the mix, what you're doing is measuring how your company's stock stacks up against similar companies. This approach ensures that you're not just holding onto a high-flyer but also getting a good deal compared to its peers.
In fact, a study by the CFA Institute reveals that over 80% of successful equity fund managers use both techniques to build their portfolios.
They seek out stocks that are not only fundamentally solid but also attractive within their sector, striking a balance between intrinsic worth and extrinsic factors.
The Big Takeaway
Either way, when it comes down to it, this approach can help you assess your company's stock's true value and strategically decide when to hold or sell your equity stakes, which is crucial in a sector where innovations and market shifts often happen at a moment's notice.
With that said, however, it's worth noting that each method comes with its own challenges.
That's because absolute valuations hinge heavily on the accuracy of your future earnings projections and discount rates, which can be highly subjective and vary with market conditions.
At the same time, relative valuations, while useful for contextual analysis, might lead you astray if the broader market is distorted by speculative bubbles or volatile investor sentiments.
That's why merging these valuation strategies offers you a holistic view that reduces the risks associated with relying on a single method.
Nevertheless, staying informed and flexible in your approach can allow you to make smarter, more stable investment choices and position you for a more disciplined approach to managing a key component of your wealth.
Tech is Selling Off, Now What?
Markets are selling off. What should you do?
Well, you might feel the urge to sell, and that's normal.
Because when stocks fall, your first instinct is to do something, right?
But let's talk about what doing something can look like without making decisions you'll later regret:
Step #1: Anchor Yourself to Your Financial Plan
Before you follow the crowd into selling, take a deep breath and revisit your financial plan.
Now, this plan is the rock on which your investment decisions should stand, especially when the markets are falling.
Ask yourself: "What am I investing for, and according to my plan, what should my next step be?"
Now's a great time to reassess your current strategy and ensure it still aligns with your long-term goals.
Remember, a well-crafted plan keeps you looking ahead, no matter what's going on in the markets.
Step #2: Evaluate Your Cash Reserves
If you're retired or depend on your investments for daily living, market drops can feel especially frightening.
That's why it's crucial to ensure you have enough liquidity on hand to cover your immediate needs without compromising your investment strategy.
To this end, ask: "How much cash on hand do I need to keep the lights on for the next six months?"
Then, check your cash reserves. Are they sufficient?
If not, and you absolutely need to sell, do so strategically.
Sell just enough to cover your short-term expenses. This way, you can leave room for your assets to recover and grow over time.
Step #3: Limit Your Exposure to Market Noise
Finally, it's easy to get glued to financial news, but too much noise can lead to stress and poor decisions.
So then, take a few moments and ask: "Am I consuming too much media, and is it affecting my investment choices?"
Often, the wisest action is inaction.
If your financial plan is in order and your cash needs are met, consider stepping back from the media frenzy.
Markets go up and down but remember, this isn't new, especially given the tech sector's rally this year.
Ultimately, success is about not letting the herd mentality sway you. Stick to your plan, keep calm, and carry on investing wisely.
Remember, it's about staying sane, solvent, and strategically set for the future.
Why Does the Market Care About FOMC Meetings?
Why does the market care about FOMC meetings?
And more importantly, why should you care?
Well, the short answer is that the decisions made by the Fed can influence the economy, can influence business earnings, and, hence, can influence the direction of the markets.
You see, the Fed was created by Congress well over a hundred years ago.
The Federal Reserve's Role in the Economy
And today, it has two main mandates: the first is to ensure maximum employment and the second is to maintain price stability.
In other words, the Fed’s role is to ensure that inflation remains in check and that unemployment doesn’t get too far out of control for too long.
So then, at regular intervals throughout the year, during these Federal Open Market Committee (or FOMC) meetings, policymakers assess whether they’re doing what’s necessary to stick to their commitment.
Now, there’s only so much that any one institution can do to control what businesses charge for goods or services or whether they’re prepared to keep hiring.
How Interest Rates Affect the Economy
However, the one thing that the Fed does have control over is short-term interest rates.
And so, you likely know that when the interest rate on your credit cards, or your auto loan or your mortgage goes up, your willingness to spend likewise goes down, right?
Well, in a similar way, the Fed sets its policy rate so that it’s more expensive for businesses to borrow when inflation is getting out of control.
And when inflation is stabilizing, and jobless claims are on the rise, then policymakers consider cutting rates to incentivize borrowing and boost economic activity.
Put a different way, it’s all about the way that money flows through the economy.
When the tap is open and money is flowing freely, the economy is typically humming, but inflation tends to take off as well.
Why You Should Pay Attention to FOMC Meetings
Alright, so with all that said, why does the market care about FOMC meetings?
Well, when the Fed begins raising or lowering rates, it’s typically part of a broader trend. Here again, when interest rates are set to fall, businesses could benefit from lower borrowing costs, and potentially lead to increased profitability and therefore support higher stock prices over the long-term.
So then, why should you care about what the Fed is doing?
Well, when the Fed does something in line with market expectations, this often translates into a higher portfolio value for your retirement savings.
What’s more, understanding the Fed’s decisions can help you make better spending choices, especially if you plan to finance a big-ticket purchase like buying a new home.
At the same time, it can also help you determine whether it’s a prudent time to go out and find that new job.
That’s because when the Fed starts cutting rates, it can signal that a potential economic slowdown is underway and suggest that the job market might soon tighten.
So then from this perspective, it's crucial to approach job changes with caution when the Fed is preparing to cut rates.
Either way, staying on top of the Fed’s latest policy rate decision, and more importantly, understanding why markets respond the way they do, will likely help you make better financial decisions and at the same time, help you make career choices that ultimately set you up for success.
What Does Today’s GDP Release Mean to Your Money?
Data came out this morning showing that Gross Domestic Product here in the US grew faster than expected in the second quarter.
The Bureau of Economic Analysis reported that the economy expanded 2.8% on a quarter-over-quarter annualized pace in 2Q24, besting economist expectations of 2.0% growth.
But what exactly does this data point mean? And more importantly, what does it mean to your money?
Well, Gross Domestic Product (or GDP) is one measure of how the economy is performing from quarter to quarter and year to year.
How GDP Influences Business Decisions and Personal Finance
Now, this data is helpful because it's used by business leaders, policymakers, and even consumers like you and me to make decisions with our money.
For example, when the economy is doing well, business leaders are more likely to spend more money on things like software and equipment or hiring workers.
At the same time, policymakers, like those at the Federal Reserve, are keeping an eye on inflation and whether interest rates need to go higher or lower.
For everyday people, our financial choices, such as spending or saving, are influenced by the health of the job market and the cost of borrowing money.
And so, all these factors are interlinked with the performance of GDP.
So then, how does understanding GDP data impact our daily life?
Well, understanding trends in GDP data can helps you better anticipate changing economic conditions and make smarter choices with your money.
So far, so good, right?
Market Reactions to GDP Data and Future Expectations
Now, leaves us with another key question, and that’s : why are markets so keen to paying attention to this data?
Well, over the long term, robust GDP growth usually supports strong corporate earnings, which can support trends of rising asset prices.
But, in the near term, the impact of GDP data often relates to how it fits into the current market narrative, which influences daily market movements based on whether it supports or contradicts prevailing investor expectations.
And what exactly does this mean?
Well, it means that despite solid GDP growth this year, a dominant market narrative is the expectation of a potential rate cut by the Federal Reserve.
Now, typically, the Fed might lower rates to stimulate the economy during periods of slower growth, not when it's expanding.
But, if inflation remains under control despite solid growth this year, the Fed could consider a rate cut to preemptively mitigate a deep economic downturn, which would align with investors' expectations of a soft economic landing.
Therefore, market participants are keenly analyzing today's GDP report for indications that strong growth can coexist with controlled inflation and potentially lead to a rate cut later this year.
Either way, having a basic understanding of the macro data will not only help you make more informed financial decisions, it will also give you something to talk about during your next team call.
Expected Returns and Your Retirement Portfolio
"Get a 12% return on your investments." Sounds great, doesn't it?
Well, it's great until you begin reading the fine print.
You see, these sorts of claims raise eyebrows among professional investors because expected rates of return on a diversified portfolio are often lower.
So then, understanding what goes into your expected return can help make you a more informed investor and to be better prepared for retirement.
What, then, is your expected return?
Well, simply put, it's the growth you need from one year to the next that helps you calculate your retirement portfolio savings need.
But, if you're overly optimistic and assume too high a rate of return, you could risk saving too little if markets underperform your expectations.
On the other hand, you could end up forgoing early retirement if your assumptions are too conservative.
So, how can you set a realistic expected return?
Well, start by assessing your risk tolerance.
Here, what you'll want to do is to consider how you typically react to big swings in the markets.
For example, when the market is volatile, do you panic and think about selling, or do you remain committed to your long-term strategy?
Understanding your reaction to these situations can greatly influence the suitability of different investments for your portfolio.
Next, understand that different investments yield different returns.
That is, stocks are generally riskier with higher potential returns, whereas bonds offer lower, more stable returns.
Finally, pull everything together and build a diversified portfolio of stocks, bonds, and other assets that align with your risk tolerance and investment objectives.
From here, your portfolio's composition will help you arrive at an expected return based on a realistic set of assumptions.
So, the next time you hear a promise of double-digit investment returns, remember to read the fine print.
And more importantly, arm yourself with the knowledge you need to set realistic expectations based on your risk tolerance and develop a disciplined investment strategy.
A Concise Case for Emerging Market Investing
Are you an emerging markets investor?
You know, it’s a big world out there, and focusing solely on US markets could mean missed opportunities.
I mean sure, when you look at the US, it's clear that our markets are the largest and most liquid of any other country around.
But here’s the thing: US markets represent only about 45% of global stocks traded, while our economy represents just about a quarter of the world's total.
So, what does that mean?
Well, it means that there’s a whole world of opportunities out there, especially in emerging markets and it's worth taking a minute to think it through.
More specifically, when it comes to investing in countries like China, India and Korea, it’s crucial to note that these emerging markets account for around a quarter of the world's stocks traded.
But here's where it gets interesting: emerging markets contribute to nearly half of the world’s economic output.
And so, if you stop to think about it, there’s a mismatch here, right?
Well, that’s where the investment opportunities come in.
You see, in developed markets, like the US, the median age hovers around 42 years old.
But if you look at what’s going on in emerging markets, excluding China, the median population age is around 26.
And so, that age difference isn’t just a number; it reflects a youthful population that’s likely to drive consumption, innovation, and global economic growth in the years ahead.
So, why should you care?
Well, incorporating emerging markets into your portfolio isn't just about diversification.
It's about tapping into a demographic dividend and growth potential that could redefine economic and corporate earnings patterns in the years ahead.
So then, as you’re considering your disciplined investment strategy, be sure to consider how tapping into emerging markets likely could not only spread out your investment risk but also anchor your portfolio in the potential growth of tomorrow's economy.
The Bull Market's Unstoppable Momentum in 2024
The past two years have been remarkable for investors, with the S&P 500 posting back-to-back gains of over +20%.
The chart below takes a closer look at 2024’s price movement and uses yellow shading to mark the days when it closed at an all-time high. At the start of this year, the S&P 500’s previous all-time high was set in January 2022.
It took over two years to reclaim the prior high, but once the index broke through in late January 2024, it set more than 50 new highs this year.
The list of all-time highs illustrates the current bull market’s strength and persistence and could grow by year-end.
Large-cap technology stocks, such as Nvidia, Meta, Amazon, and Tesla, have posted strong returns and played a major role in driving the index’s gains. The S&P 500’s record-setting performance is part of a broader cross-asset rally that has lifted stocks, bonds, and commodities.
The stock market’s steady climb this year speaks to investors’ growing confidence. Investors are optimistic about the artificial intelligence industry’s growth potential. The economy has outperformed expectations driven by robust consumer spending, growing at an above-trend rate in Q2 and Q3 despite high interest rates. After the November election, the stock market rally intensified as investors focused on the incoming administration’s policy agenda.
Expectations for tax cuts, deregulation, and energy production are fueling hopes for stronger economic growth. The bond market echoes the confidence in equity markets, and corporate high-yield credit spreads are at levels not seen since May 2007.
The question on many minds is whether the momentum can continue in 2025. The S&P 500 currently trades at over 22x its next 12-month earnings estimate, a level not seen outside of periods like the late-1990s tech boom and the post-COVID recovery. Investors have shown a willingness to pay higher multiples, but with valuations at extremes, earnings could play an important role in determining the stock market’s next move.
The current bull market, which started in October 2022, is now in its third year, and it’s common to see investors shift focus to fundamentals as the bull market matures.
2025 is shaping up to be a year where companies will need to deliver on markets’ expectations to justify their high prices and investors likely will need to remain mindful about taking on more risk than necessary at this point in the market cycle.