The Trump Rally Pushes Stocks to All-Time Highs
Leading into the presidential election, market participants broadly anticipated heightened volatility. However, just as election polls got it wrong, so did market forecasts. The market was surprisingly resilient, with the major stock indexes ending October nearly flat. While the VIX “fear” index was elevated, it was more of a reflection of hedging activity ahead of the election. With what is expected to be a Republican sweep (pending the House results), investors have cheered the prospect of lower taxes, deregulation, and strong earnings growth—pushing the S&P 500 Index and Nasdaq Index to record levels.
Economic and Market Conditions
Since the Federal Reverse cut the Fed Funds rate by 50-basis points in September, the 10-year Treasury yield is up nearly 65 basis points amid expectations of stronger economic growth and potential inflationary pressures. With another 25-basis point cut after the election, the yield curve continues to steepen. Fed Chair Jerome Powell emphasized that the rate cut, which brought the federal funds rate to a range of 4.50% to 4.75%, was designed to sustain economic expansion and support progress toward the Fed’s 2% inflation target. Powell highlighted that inflation has cooled to 2.1%, nearing the Fed’s target, but noted signs of moderation in the labor market. While overall economic data exceeded expectations, October nonfarm payrolls increased by only 12,000, weighed down by strikes and weather disruptions. The unemployment rate remained steady at 4.1%, and there continues to be strong consumer spending data.
Political Impact on the Market
Donald Trump’s surprise election victory has injected new dynamics into market sentiment. Investors have welcomed the prospect of deregulation and tax cuts, but attention is now shifting to policy proposals that could hinder growth and spur inflation. Key concerns include Trump’s plans for universal tariffs and large-scale deportations of undocumented workers.
Outlook and Strategy
The market’s ability to navigate these uncertainties will depend on the administration’s fiscal and trade strategies, as well as the Federal Reserve’s response to evolving economic conditions. We are constructive on the markets, as the underlying fundamentals are still quite solid. We prudently pulled some risk off the table recently but are still bullishly positioned. There are still opportunities around the globe, but much or our tactical positioning stays focused on the U.S. market. Rates have risen on solid growth prospects, but we’ll be monitoring for signs that the bond vigilantes push rates too high for the stock market’s liking on inflation and debt concerns stemming from potentially aggressive Trump policies.