November 2024
“If we got one-tenth of what was promised to us in these acceptance speeches, there wouldn’t be any inducement to go to heaven.” — Will Rogers
At press time it appears President Trump has been reelected as U.S. President, Republicans control the Senate and seem poised to take the House. The early read from the equity markets is optimism likely based on the prospects for pro-growth policies – generally, lower taxes and less regulation. Bond markets seem a bit more cautious, perhaps reflecting stronger growth prospects but also concerns related to the expectation of a policy agenda that lacks fiscal responsibility indicating a continuance of out-of-control annual government deficits.
After an intense and contentious election season, we can take solace in not having to endure weeks or months of a contested election and all the volatility and uncertainty that would have implied. It wouldn’t surprise us if some of the equity market reaction is a relief trade based on that fact. Despite the concerns regarding confidence in the election process, whether an individual voter likes the result or not, we can assert the democratic process worked, and a peaceful transition of power should result.
As Will Rogers suggested, what it takes to win an election is one thing, governing is an entirely different ball game. While there are many policy implications that could be explored based on election rhetoric, we will wait until the dust settles and pay more attention to actions versus words.
US Economy: Healthy with headwinds.
The U.S. economy appears to have good momentum, pending uncertainty about policy changes under the new President and Congress. U.S. GDP growth was revised higher (+3% in Q3) with consumers benefitting from above-trend wage growth, a higher-than-expected personal savings rate and a still tight labor market. That said, many households are struggling with high prices and borrowing rates, corporate earnings expectations are falling, and lower interest rates have yet to be a salve for the rapid decline in home sales.
US Stocks: Taking a breather.
U.S. equity market enthusiasm dissipated a bit toward the end of October, with only financials (+2.7%) communications (+1.9%) and energy (+0.8%) finishing in positive territory for the month. At root: Uncertainty heading into election day; and less optimistic earnings guidance from the tech giants. Small-cap stocks fell further as better-than-forecast economic data has investors expecting fewer interest rate cuts from the Fed.
Foreign Stocks: Dollar drag.
International stocks gave back some of the relative performance gains they had made through September. A rally in the U.S. dollar on potentially less accommodative Fed policy was a major factor in relative performance: Returns in local currency terms were nearly 4% higher for developed market stocks and 1.5% higher for the emerging markets.
Fixed Income: Mixed results.
While interest rates for shorter maturities such as T-bills have fallen in tandem with Fed policy, longer-term rates have continued to rise since the middle of September, reflecting a blend of factors including: The financing of higher U.S. federal deficits without fiscal probity in sight; potential for improved U.S. economic growth and the rekindling of inflation; and policy uncertainties under a new administration. Consequently, interest-rate sensitive bonds with longer maturities fell during the month.
Real Assets: Fallout from rates.
Real assets were not immune to the October selloff although commodities and infrastructure each slightly outperformed global equities. REITs have struggled owing to the common thread of rate expectations. REITs (+10.1% YTD) had benefitted from hopes that lower rates would defrost capital markets for office space and allow for more profitable financing, which now looks less likely. Meanwhile, gold (+4.6% in October) continues to benefit from the fractured geopolitical landscape.
Alternatives: Defrosting still.
Private markets have many compelling opportunities, but difficult capital markets have made for a slow pace of investment. Illiquid alternatives, such as private equity and real estate, have been challenged by wide bid-ask spreads (the difference in fair price assessed by buyers vs. sellers.) Valuations have generally inched higher, and while rising interest rates and economic uncertainty remain headwinds, private equity fund transaction activity is beginning to increase and so are fund distributions.
Source of data: Bloomberg
Equities Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (0.9%) | 21.0% | 38.0% |
| U.S. Small Cap | (1.4%) | 9.6% | 34.1% |
| U.S. Growth | (0.4%) | 23.5% | 43.4% |
| U.S. Value | (1.1%) | 14.9% | 31.0% |
| Int’l Developed | (5.4%) | 6.8% | 23.0% |
| Emerging Markets | (4.4%) | 11.7% | 25.3% |
Fixed Income Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (2.5%) | 1.9% | 10.5% |
| TIPS | (1.8%) | 3.0% | 8.6% |
| U.S. High Yield | (0.6%) | 7.4% | 16.5% |
| Int’l Developed | (1.1%) | (0.6%) | 4.8% |
| Emerging Markets | (0.2%) | 5.6% | 9.1% |
| Tax-Exempt | |||
| Intermediate Munis | (1.0%) | 1.4% | 7.0% |
| Munis Broad Mkt | (1.4%) | 1.2% | 10.3% |
Non-Traditional Assets Total Return
| OCT | YTD | 1 YR | |
|---|---|---|---|
| Commodities | (1.9%) | 3.9% | (1.2%) |
| REITs | (3.6%) | 10.1% | 34.1% |
| Infrastructure | (1.3%) | 16.5% | 33.3% |
| Hedge Funds | |||
| Absolute Return | 0.0% | 4.1% | 5.8% |
| Overall HF Market | (0.5%) | 4.6% | 7.2% |
| Managed Futures | (3.0%) | (0.6%) | (4.2%) |
Economic Indicators
| OCT-24 | APR-24 | OCT-23 | |
|---|---|---|---|
| Equity Volatility | 23.2 | 15.7 | 18.1 |
| Implied Inflation | 2.3% | 2.4% | 2.4% |
| Gold Spot $/OZ | $2744.0 | $2286.3 | $1983.9 |
| Oil ($/BBL) | $73.2 | $87.9 | $87.4 |
| U.S. Dollar Index | 124.8 | 122.5 | 123.8 |
Our Take
As we stated at the start, the much-anticipated election night has come and gone. The big surprise may not necessarily be the result itself but that it was a decisive, uncontested outcome. However, as we have noted previously, while the Presidential race garners the most headlines, the makeup of Congress is just as (if not more) meaningful to financial markets and investors. At press time the Senate has flipped to Republican leadership and the House looks poised to remain Republican, but votes are still being counted.
The election and these other considerations do not alter our view on portfolio construction. Historically, maintaining a steady hand with a strategic asset allocation as your north star and investing through political cycles, regardless of the outcome, has proven to be the right decision. Our focus remains on sourcing long-term opportunities for clients and identifying new risks that may manifest themselves in an environment that could be marked by above average volatility alongside higher geopolitical and global economic uncertainty. What we are paying careful attention to in the near term:
- The Fed and interest rates. Data has validated market expectations for a soft landing, for now. However, the follow-on conclusion is that the Fed is likely to be less accommodative and more likely a headwind to markets if inflation picks up. With the October selloff as evidence and Fed funds futures suggesting only 1.25% in additional rate cuts, down from 2% just over a month ago, investors seem to be coming to that conclusion. This week’s Fed meeting and Chairman Powell’s press conference over the next couple of days will be revealing regarding where they stand based on the mixed economic signals.
- The President Elect’s cabinet selections. We should be getting a read on cabinet selections over the coming weeks. The new administration’s cabinet members, across functions, could have a material impact on specific industries, the economy and the bond market starting with the U.S. Treasury Secretary pick. And while not a cabinet member, Chairman Powell’s future may be called into question despite his term ending in May 2026, which could rattle markets.
- Prospects for a second wave of inflation. Real assets including commodities can further enhance diversification and serve as a long-term store of value especially with the increased risk of an additional wave of inflation as the new administration hits the gas pedal on pro-growth policies. It is important to remember that equities can actually perform well in an inflationary environment as long as inflation doesn’t spiral out of control.
- The unknown unknowns. An unexpected shock to the system is always possible but it is perceived as more likely during periods of higher instability, where we find ourselves today. The state of homeostasis that we’ve all become used to can quickly evaporate as an exogenous shock changes stability to instability. Some of our diversifying portfolio exposures are likely to hold up a bit better than others if we experience equity and/or bond market volatility as the composition of the new administration unfolds.
And let’s not forget that there is also potential for positive developments. The great uncertainty enveloping the election likely put a damper on economic activity, which can now resume. On top of that, central bankers in the world’s major economies are lowering interest rates, corporate profit growth is accelerating across the globe, and companies continue to enjoy historically wide profit margins. Finally, it is possible that investors may be overestimating the risks to the global economy, and the risks could even be to the upside barring continued escalation of the two major wars.
We would like to finish up on a positive note. This election cycle has been exhausting regardless of what side of the aisle you sit on. We think we can all agree that we are glad it’s over and the electoral process worked. The new administration has a lot of challenging economic, social and geopolitical issues it will need to tackle. Running an election is difficult, governing effectively for all Americans is much harder and more complex. There are no easy fixes. We hope the adversarial nature of the election process is replaced by a focus on both parties working together to solve the many pressing issues we and the world face. We have faith in the resilience of our Republic to adapt to these changing times and come out on the other side stronger and healthier.
