Trump Win Sends Stock Markets Higher
The initial market reaction to Trump’s electoral victory was positive for stocks with most major U.S. indices posting excellent returns in November. The S&P 500 rose 5.9% and the Dow Industrials surged 7.7%. Measuring from election day (November 6th), Value-oriented sectors such as Financials, Industrials and Energy significantly outperformed. This “broadening” of performance was refreshing for a market that has leaned so heavily on Nvidia and other technology stocks for returns this year.
December Pivot
December thus far has witnessed profit taking and a shift in market leadership. Leadership shifted back to Growth and away from Value. Leading the Growth pack is the Magnificent 7[1], which is reminiscent of 2023. The much hoped for broadening of market performance is back on pause as Value names retraced some of last month’s gains. As a proxy for Value, the Dow Industrials are down approximately 5% this month in stark contrast to the Magnificent 7 that are up approximately 10%. It remains to be seen if this trend will persist or if this is typical seasonal behavior with investors crowding into winning names and tax loss harvesting losers.
2024 Reflections
As 2024 wraps up, investors have enjoyed another year of outstanding stock returns and mediocre fixed income returns. The S&P 500 is likely to match or slightly beat last year's 26.3% total return. Driving returns this year was the surge in AI stocks, specifically Nvidia, and in Electrification stocks – those companies that provide data center infrastructure and the electricity generation necessary to operating the growing number of AI data centers. These two themes have played significant roles in our portfolios, and we would expect that to continue in the future.
Solid stock picking was also rewarded as the economic backdrop enabled great companies to outperform. Gold was also a big contributor to performance as growing budget deficits and central bank buying fueled its increase.
Bonds had another muted year. The Bloomberg U.S. Aggregate Bond index is likely to finish up slightly this year. This positive finish understates the drama experienced during the year. Entering this year, the UST 10 yield was 3.9% and the market was expecting the Fed to cut interest rates six times this year. In reality, there were only four rate cuts. This required an upward adjustment to the market’s rate expectations and, therefore, a headwind for bonds. The UST 10 yield is currently ~4.5%, so to eke out any return in bonds this year was a small victory. Bonds, however, have been a material drag on portfolio returns.
Nevertheless, 2024 gave investors the opportunity to compound wealth.
Business Optimism is Up
Small business optimism has also increased sharply in the wake of the election. Small businesses have been most hurt by inflation and are more exposed to higher interest rates. As such, the last few years have been very difficult for these vulnerable businesses. The spike upwards in optimism is a promising sign for the economy. The Office of Advocacy, a small business watchdog group within the federal government, calculates that small businesses contribute 44% of U.S. economic activity[2]. Notably, there was a similar spike in optimism after the 2016 election which led to several years of strong economic growth.
Source: NFIB
Consumer Optimism in Stocks is Up
A similar surge in consumer confidence has been reported in consumers’ expectations that stocks will rise next year, according to the Conference Board’s survey. As depicted below, confidence in stocks has grown steadily over the last two years as inflation and recession fears receded so this increase may be less attributed to the election’s results, however, the surge in November is reminiscent of the surge after the 2016 election.
Source: Conference Board
Flows into ETFs/Mutual Funds Surged
The wave of optimism created a flood of money into stocks in November. According to ICI, which tracks money flows in/out of ETFs and mutual funds, stock focused funds experienced approximately $72 billion of inflows in November far outpacing prior months. This surge, however, is a mere fraction of the amount of money still sitting on the sidelines. As of December 18th, there is $6.8 trillion of money market assets (i.e., cash) that could serve to fuel future stock purchases[3].
Source: ICI
Thoughts on 2025
As we enter 2025, there are three main reasons to remain optimistic about investing conditions.
1. Strong Economic Backdrop
The U.S. economy remains strong. We have talked extensively about the labor market, consumer spending and the Services sector. We clawed through the data in search of weakness. Recall, our greatest fear was that persistently restrictive monetary policy (i.e., high interest rates) could eventually weigh on the economy. This has not happened. As shown below, the S&P Global Services PMI, which is a measure of the health of the Services sector, continues to show solid growth.
Our message for 2025 is “so far so good” on the economy. In fact, the economy is on very good footing and provides an excellent launch pad for markets. Third quarter GDP, for instance, grew 3.1% on strong Personal Consumption. This could change, of course, but we are closely monitoring the data and can tactically adjust our portfolios should the data deteriorate.
Source: S&P Global
2. Tailwinds from Lower Taxes and Deregulation
On the campaign trail and post-election, President-elect Trump and his emissaries have consistently discussed cutting taxes and eliminating regulations. With a Republican Congress in tow, it seems the Trump Administration has a reasonable chance of success enacting most of their tax policies. Striking regulations can generally be accomplished with the stroke of a pen. Presumably these actions would be pro-growth.
Importantly, there may be offsetting actions that could reduce or even eliminate the tailwinds from lower taxes and regulations. Namely, tariffs and their potential impact on the economy. Therefore, much is unknown at this time, but it bears noting that the Trump Administration’s top goal is to grow the economy.
3. The Fed Put is Back
Finally, we enter 2025 knowing that the Fed is in rate cutting mode. Further, we know they are focused on the labor market and that they will defend it upon weakening. While the pace back to neutral (possibly ~3% Fed Funds) is unknown, we feel better that the market has low expectations. With just one 25bps rate cut priced into the market today, the impact of more rate cuts and a Fed willing to react to weakness is comforting.
Conclusion
We enter 2025 with optimism. Yes, there are many uncertainties. That’s the nature of investing. Yes, we could get a pullback of five or even ten percent at some point. That is completely normal even in bull markets. But so far so good. The pillars are in place for the bull market to continue: strong economy, pro-growth policies and the Fed put. Within the market, we see several opportunities. For example, the AI and Electrification themes are evolving but are still in the very early innings of their secular trends. The pace of innovation is accelerating at a speed we have never seen before and that usually leads to incredible investment opportunities. Moreover, there are plenty of overlooked opportunities that offer tremendous value. So, as we enter 2025, we remain vigilant and focused on delivering investors superior risk-adjusted returns.
Disclosures
LIM is an Investment Advisor based in Dallas, Texas and registered with the Securities and Exchange Commission. Registration does not imply a certain level of skills or training. LIM is a company with purpose, dedicated to creative and unique thinking. We focus on portfolio valuation and research, along with superior client experience. We seek to identify investment opportunities by looking at economic factors, security valuation and human behavior. We start with the fundamentals of portfolio management and valuation. Then we build on these fundamentals with unique thinking and creative intelligence gathering to form a viable investment thesis. We believe this approach leads to dynamic global portfolios with increased return and managed risk. LIM utilizes Charles Schwab & Co. Inc. (“Schwab”), a FINRA-registered broker-dealer, member SIPC, as its custodian of assets. LIM is independently owned and operated and not affiliated with Schwab.
Additional disclosures:
This document may contain forward-looking statements based on LIM’s expectations and projections about the methods by which it expects to invest. Those statements are sometimes indicated by words such as “expects,” “believes,” “will” and similar expressions. In addition, any statements that refer to expectations, projections or characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guaranties of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual returns could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results.
Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
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Definitions
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 (stock price times number of shares outstanding), with each stock’s weight in the Index proportionate to its market value.
The Nasdaq Composite Index is a market cap-weighted index, representing the value of all stocks listed on the Nasdaq Stock Market. The composition of the Nasdaq Composite is a mix of long-established companies that have been on the exchange since inception, to IPO newcomers, companies that grew from OTC exchanges or switched from other exchanges.
The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
The Bloomberg US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-dominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate pass throughs), asset-backed securities and commercial mortgage-backed securities.
The S&P 500 Equal Weighted Index is the equal-weight version of the S&P 500. The index includes the same constituents as the capitalization weighted S&P 500 index, but each company is allocated the same fixed weight at each quarterly rebalance.
The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 Index total market capitalization.