“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”
— Robert G. Allen
October is usually an interesting month for the markets, more so in a Presidential election year. This time around we found market action to be relatively subdued. The US-based equity indexes we follow were all down modestly. The international equity indexes fell more precipitously. With a strong US dollar (up 3.01% for the month) as a headwind, we are not surprised. The Aggregate Bond Index, while still positive for the year, was down 2.59% for the month. The CRB Commodity Index was also down in October.
All data as of 11/01/2024, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
We have been publishing our market thoughts for more than a decade now, covering many topics that relate to the stock market. The broad scope of what we address is based on the idea that the stock market does not exist in a vacuum. The market is emotional and related to the economy.
This month we will be discussing the one topic we have avoided all these years – politics. We are writing this the day after the Presidential election (Wednesday November 6, 2024). We are delving into this topic for two especially important reasons.
First, we think it is important to describe the issues and policies we believe are important to investors. With the uncertainty of politics behind us, we must now confront the uncertainties of policy.
In addition, we feel it is important for you, our clients, and future clients, to understand our thought process with the policies and policy uncertainties investors face in the coming months and years. To be clear: if you are looking for a partisan spin, stop reading. Our perspective is purely about your investments and investment outcomes.
Let’s dig in …
Policies That Matter
As we mentioned above, now that the election is behind us, we believe the uncertainty investors face is policy related. Inflation – a big issue for voters – is not dead. The bond market, in our opinion, has also shown concern. The 60ish basis point (BIP) move in the 10-year Us Treasury Bond since September in the face of short-term rate cuts by the Federal Reserve Bank (The Fed) can’t be what Chairman Powell wanted to see. The economic concerns are real.
Policy uncertainty stems from campaign “promises”. There were a lot of policy statements made by both candidates, but now, we are only concerned with those made by the winner, Donald J Trump. What we don’t know, is how these “promises” translates to actual policy. What we will look for are decisions on specific policy initiatives, prioritization, then implementation of those decisions. More complicated are the agenda items which require congressional legislation. As we have seen in the past, when you have 535 different policymakers with a variety of agendas, getting enough votes can be a challenge.
Trade & Tariffs: We start here because trade and tariffs have been one of the major themes of the Trump campaign, and it is something he can do shortly after taking office without Congressional authorization. There has been talk of a 10% across-the-board tariff on all imported goods. A 60% tariff on all goods made in China has also been proposed.
At the same time, we recognize that President-elect Trump has not necessarily linked them together in the traditional sense. In his first term as POTUS, tariffs were used in effort to protect US economic interests, often a negotiating tool with our trading partners. Yet, out on the 2024 campaign trail he has talked about tariffs in connection with long-term tax policy. We don’t believe tariffs can be a method of negotiations and a steady tax source.
This leaves us concerned about what the actual policy will be and how it gets implemented. Many of the companies in the S&P 500 have overseas operations. As we found out during 2020, supply chains are spread throughout the world. If tariffs are implemented as an across-the-board hit, as opposed to picking a choosing specific items like steel, we believe that there will likely be many companies that have disruptions and higher costs associated with their business models.
Tax Policy: As we briefly touched on in the previous section, out on the campaign trail President-elect Trump said he would use tariffs to fund tax cuts. Additionally, the 2017 tax legislation is set to expire at the end of 2025. Tax policy priorities appear to be lowering the corporate tax rate to 15% from the current 21%, stop taxing tips, overtime pay, and interest on auto loans. This comes at a time when the cost of interest on the national debt has crossed above $900 billion per year.
We believe that what happens here is very much dependent on what Congress looks like in 2025. As of November 6, 2024, we know that the Senate will be controlled by Republicans. The composition of the House of Representatives is still too close to call. We believe that under Republican control of both houses of Congress it is highly likely that most if not all the above would get passed. We believe it is unlikely that any Republican representative or Senator would balk at any of this. How it plays out with Democratic control of the House is unknown. There would have to be negotiating.
Regulation/Deregulation: In our opinion, the big move in the stock market the day after the election was more than a relief rally. Under a Trump administration the market is expecting a few things to happen. First, a rebound in mergers and acquisitions. Second, a more corporate friendly regulation environment which could make US Corporations more profitable. How this plays out over time is a big unknown and is more sector related than overall market related in our opinion.
Our Approach to Changing US Government Policy
It has been said that the 2024 election is the most important election of our lifetime. We should note that this line was used in 2016 and 2020. We believe what makes this election so important is it is the one that just happened. It is the election we must deal with today.
As we look ahead, thinking in simple terms of if this happens then that will happen doesn’t make sense to us as the reaction to policy is not that simple. We believe the best approach is thinking about outcomes in terms of game theory.¹ The real world is complicated. The world is interconnected in ways that are not always easily understandable. Every decision made by the US Federal Government affects economic players domestically and globally.
Policy decisions made in Washington will have a ripple effect. Using tariffs as an example, starting in 2018 the Trump administration started to implement tariff increases on a variety of countries and products. China, in response, made the decision to drastically reduce its reliance on food stuff from the United States and started buying from other countries. Domestic farmers suffered losses to the point that the Federal Government responded with a “bailout” of US farming interests to avoid greater economic suffering and bankruptcies.
Economists at the Federal Reserve Bank of New York and Columbia University who researched this period came to a few conclusions. First, the impact of tariffs was more negative than what was expected by economists. Second, the effect on productivity was negative, holding down US growth rates, as firms that are not the most efficient are protected by these policies. The researchers also note that stock price reaction to policy announcements is a useful tool in deciding the economic effects of the announced policies. “Movements in stock prices tell us about changes in the expected future value of firm-specific capital (both tangible and intangible).”²
To be very, very clear, we are keeping an open mind to what is happening in real time, understanding that the making of policy can be complicated, messy, and a drawn-out affair. At the same time, we cannot deny that policies that are implemented by legislation or the Executive Branch do not always have the desired effect.
We will be looking at how policy changes affect the major asset classes – equities (foreign and domestic), the bond market, commodities, currencies – as well as the different sectors of each asset class.
Can the current stock market bull market continue?
This year has been particularly good to equity investors. After a few years of the S&P 500 being dominated by a few of the largest stocks, market leadership broadened out with most sectors taking part in the upside. Post-election, the trend higher has accelerated (at least in the short-term).
The short answer to the headline question is yes, we believe the bull market can continue forward. More to the point, we expect the stock market to continue to rally into the end of the year. What happens come January 2, 2025 we believe is very much an unknown.
Chart #1: www.stockcharts.com Data 01/01/24 – 11/08/24 as of 11/09/24. An index is not managed and not available for direct investment. MA 50 = 50-day moving average MA 200= 200-day moving average. Past performance is not a guarantee of future results.
Final Thoughts
We believe that one of the biggest mistakes an investor can make is allowing one’s personal politics dictate investment decisions. The truth of the matter is that the stock market has performed well under both Republican and Democratic administration. In the short term the stock market is fueled by emotions, but in the long term, it is powered by corporate earnings. Corporate America has consistently shown they know how to adjust to the changing political climate to continue to grow earnings. In the end, earnings are what matter.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
Robert I. Cahill, Partner Rob.Cahill@wfafinet.
Jonathan D. Soden, Managing Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Senior Account Administrator Jay.Knight@wfafinet.com