Trump Wins. What Lies Ahead?

Week in Review

The resolution of the U.S. election provided much-needed clarity in the markets, resulting in the strongest post-election rally in history. The Republican victory in the presidency, Senate, and potentially the House has given them a solid mandate for their policies. While campaign promises are not always translated into action, the shift in power could have significant implications for the markets.

One potential effect is the implementation of tax cuts and deregulation, which could further boost economic growth and support the current rally in stocks. However, there are also concerns about tariffs and growing debt, which could drive up interest rates and put pressure on bonds. Our view is that rates still come down from current levels.

The Federal Reserve has already lowered interest rates twice this year and maintains that their policy is still restrictive. However, with the possibility of strong economic growth and looser fiscal policies in the future, the Fed may take a more cautious approach in their rate-cutting decisions. This could lead to a reevaluation in the markets, with investors anticipating a less aggressive rate-cutting cycle.

The potential impact of the various proposals put forth by the current political campaigns on the stock market remains uncertain. It is difficult to predict the extent and timing of any potential policy changes, as well as their overall effect. Despite this uncertainty, there are signs that the underlying conditions driving long-term market performance are generally favorable.

For instance, the economy has consistently exceeded expectations and is currently growing at an above-average rate, largely fueled by strong consumer spending. While a moderate slowdown is expected, there are several indicators suggesting continued strength, such as increasing incomes, stable employment, healthy household finances, and improving loan growth.

In addition, corporate profits are on the rise, supporting a positive outlook for stocks. The projected earnings growth for the S&P 500 is expected to accelerate from an estimated 0.5% in 2023 to 9% and 14% in the following years. While these projections may be overly optimistic, they still indicate a positive trend that can help sustain the current bull market, which has now entered its third year.

It is possible that the Federal Reserve may slow down the pace of interest rate cuts if inflation remains strong. However, the current yields are already quite attractive and are at the upper end of their potential range. Therefore, it may be beneficial to consider shifting investments into intermediate- and long-term bonds to secure these high yields for a longer period of time. This is because rates for CDs are likely to decrease in alignment with the Fed's policy rate.

Economic & Earnings

Investors will have a lot to keep track of next week as they delve into a slew of earnings reports, inflation data, and an address from Federal Reserve chair Jerome Powell. Among the highlights on the earnings calendar are Live Nation on Monday, followed by Home Depot, Shopify, Spotify Technology, Occidental Petroleum, and IAC on Tuesday. Wednesday brings reports from Cisco Systems and Under Armour, followed by Walt Disney, and Applied Materials on Thursday. Closing out the week's earnings will be Alibaba Group on Friday.

Home Depot earnings are expected to decline, in line with home sales due to higher rates squeezing buyers and tight supplies. Investors are hoping for better than expected earnings and the stock is expected to move 4% when it reports. Alibaba, the Amazon of China, is expected to move 6% on Friday when it reports.

On the economic data front, the main event will be the release of the October consumer price index by the U.S. Bureau of Labor Statistics on Wednesday. Experts are predicting a 2.5% increase from the previous year. On Thursday, the BLS will report on the producer price index for October, followed by the Census Bureau's release of October retail sales on Friday.

Investors will also be closely watching Powell's moderated discussion at the Federal Reserve Bank of Dallas on Thursday. This address comes just a week after the central bank announced a quarter-point decrease in the interest rate target.

Chart of the Week: Missing the markets best days has been costly, last week was one of the days you didn’t want to miss.

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.