If you’d like to listen to the replay, you can access that discussion here.
Election Recap
Heading into the election, polls suggested that it was going to be tight both nationally and across key swing states. Against the virtual draw in polls, a Trump victory was certainly a distinct possibility. If there was a surprise in Tuesday’s results, it’s that he’s positioned to win not only the electoral college vote, but easily win the popular vote as well. If the current margin holds, it would be the largest popular vote margin of victory for any Republican presidential candidate since George H. W. Bush in 1988.Beyond the presidential decision, control of Congress was also up for grabs. Coming into the election, Democrats held a very narrow margin in the Senate, while Republican’s claimed a very modest majority in the House of Representatives. As of Thursday morning, Republicans have picked up three Senate seats, enough to tip the majority in their favor despite three races that have yet to be called. In the House, numerous races remain too tight to call as vote counting continues. Thus far, Republicans hold a lead in the lower chamber, while perhaps very modestly adding to their majority. The common theme among political pundits has leaned toward Republicans likely maintaining control, although the number of individual races that remain undecided has prevented either side from definitively claiming a majority.
The Market Responds
The stock market’s immediate reaction yesterday was notable. The Dow soared by over 1,500 points in its strongest single-day gain in two years. The S&P 500 gained 2.5%, and the Nasdaq rose nearly 3.0%, lifting both indexes to record highs. From a market-cap perspective, small caps were easily the biggest winners with the Russell 2000 soaring by nearly 6%.The dollar strengthened by 1.6% vs. a basket of other currencies. The 10-year Treasury yield edged up to 4.43%, extending a gradual uptrend that began in mid-September, to reach its highest point since July.
The risk-on mood reflects expectations that a Trump administration will adopt a business-friendly stance on taxes and regulation. Just as importantly in the near term, it’s also undoubtedly a sign of investor relief that a protracted period of uncertainty or potential unrest appears to have been avoided. Uncertainty is apolitical, and markets hate uncertainty.
Yesterday’s surge in the U.S. stock market cut across most sectors, led by financials and industrials — more cyclically sensitive sectors that would benefit from a broad restrengthening of the economy and tailwinds to corporate profitability. Defensive sectors including healthcare, utilities, and consumer staples lagged.
The particularly positive response of small caps in part reflects the index’s significant exposure to both financials and industrials, which combined represent nearly 38% of the index versus about 21% in the S&P 500. Small caps may also benefit on a relative basis from less exposure to foreign-sourced revenue. Dollar strength will be a greater headwind to large multinationals that derive a large portion of their income from outside the United States.
As we discussed in our recent webinar, stocks tend to perform well in the aftermath of U.S. presidential elections, with limited exceptions. This reflects the apolitical nature of the stock market over time. While the relative sectoral winners and losers may vary, it’s the fact that a significant source of uncertainty has been resolved that’s the common thread across all election and market cycles. If history holds true, the near-term outlook for stocks could remain upbeat with positive momentum lifting stocks into year end.
Policy Priorities for 2025
At some point, attention will turn from the election outcome to the policy impact. Directionally, we can infer from President Trump’s prior term in office and campaign trail speeches that reduced regulation, greater focus on domestic oil production, and lower personal and corporate taxes will be on the docket. Trade policy will also be a critical component to his economic agenda, and one that will likely come into shape sooner than later. The imposition of tariffs is one power granted by the constitution that allows the president to act without congressional approval — one that was employed by both President Trump and President Biden. That power clears the way for President elect Trump to implement that part of his agenda more expeditiously than other priorities, including a comprehensive tax bill, which will take time to move through the legislative channel next year.The imposition of tariffs on foreign goods would be inflationary, although it’s unclear at this point how significant that impact could be or how soon the effects could be felt. Retaliatory measures taken by America’s trade partners would also be a negative for impacted industries. It’s too soon to gauge how large or broad any tariffs might be, let alone their effect on inflation.
Higher inflation expectations aren’t the only catalyst behind the recent surge in the 10-year Treasury yield, which has now risen by nearly 1% since its mid-September low. Stronger economic data has helped to reinforce the underlying resiliency of economic momentum. Still, rising inflation expectations are apparent in the surge in the ten-year Treasury yield in recent days. That also reflects the potential that stickier or resurgent inflation could limit the Fed’s ability to cut rates and may result in short-term rates remaining higher than previously forecast. However, it’s unlikely to have any meaningful impact on the Fed’s near-term plans. As we write these comments, the Federal Open Market Committee is meeting in advance of a widely anticipated quarter-point rate cut announcement set for Thursday afternoon. We’ve seen nothing of note since the last Fed meeting that should deter policymakers from taking that step.
Closing Thoughts
Looking ahead, we’d acknowledge that questions remain about what the change in leadership in Washington, D.C. will mean on multiple fronts. Among the more notable items on the legislative agenda will be a comprehensive tax bill that the President-elect and congressional republicans will prioritize next year in advance of the scheduled sunset of many provisions of current tax policy on Dec. 31, 2025. We’re collaborating with our colleagues in Plante Moran’s tax team to keep you informed of developments and will continue to do so as legislation takes shape next year. With greater clarity, we’ll be well positioned to help you evaluate any changes to your plan that would be appropriate.
In the meantime, we’ll close with one of the key points from our webinar. The benefits of portfolio diversification are seldom clearer than when investor emotions are high, whether they tilt in the direction of fear or excessive optimism. The goal of an investment policy is to provide a framework for investment decisions over the course of time and across market cycles. As always, we’ll continue to analyze changing conditions and shifts in policy direction to evaluate the potential effects on your portfolio and strategies that can position you appropriately to help you achieve your financial goals and objectives.
As always, we’ll continue to monitor developments and keep you informed. In the interim, please don’t hesitate to reach out to us with any questions or concerns you might have.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
