November 18, 2024

“Beware of little expenses, a small leak will sink a great ship”

Benjamin Franklin

Well, it seems president elect Trump is hitting the ground running, but first the numbers. The S&P 500 dropped 2.30%, the Dow Jones Industrial Average lost 1.39%, and the Nasdaq retreated 3.49%. Internationally, the FTSE 100 had a slight loss of .11% and the MSCI-EAFE slida a slight .13%. The 2 -year Treasury paid 4.307%, and the 10-Year yield was 4.445%.

As President Trump constructs his cabinet and administration it is obvious that he has learned his lessons from the past presidency and the assault on him ever since he entered the political world. The effects of the past election can only be described as historic, I know it is an overused phrase, but this will be, judging by what is happening, one we will not see again in our lifetime.

The result, if successful, will transform this government as never before. Please expect the continuation of the meltdown of the deep state and media. What is different is President Trump seems to be appointing to address very specific problems or issues and bringing in the most capable and brightest minds to address each area in need of change. In short, he will not squander his mandate. The impact to the world, our government, and the financial markets will be staggering moving forward. The only question is how successful the opposition, which is considerable, will be in obstructing or thwarting his agenda.

The scariest initiative, for the political status quo, is the Department of Government Efficiency (DOGE) and who has been given the authority. Ask the 75% of former twitter employees. The impact to the economy is enormous and many ask how the proposed tax cuts can not cause an increase in the deficit and fuel inflation.

My answer is some advice my father gave me over 50 years ago which was when it comes to money you only have two choices, “Make more or spend less”. That seems to be what the Trump administration plans on doing. Ignite the economy, (unleash the energy sector) and cut federal expenses (DOGE). In theory it makes sense, but many oxen yet to be gored. Time will tell if DOGE can pull it off.

Now on to what happened last week, Equity markets pulled back last Thursday, signaling a market top. The S&P 500 may continue to pull back in this coming week, but the decline will likely be shallow and short-lived because earnings will continue to grow. Comments from Fed chief Jerome Powell were among the day’s catalysts, indicating a cautious approach to interest rate policy over the coming months. Those comments from Powell seemed to weigh on stocks for a second day last Thursday. Powell said last Wednesday that he was in no hurry to cut interest rates. Traders now see a 40% chance that rates hold steady at next month’s Fed meeting. Until recently, a cut was seen as all but certain.

That’s not helping bond yields, which remain elevated, further pressuring stocks. The market wants a faster pace of interest rate reduction, but the flip side is that economic health remains solid and sufficient to sustain higher prices, which is good news for S&P 500 companies.

This week, earnings reports will come from several retailers, including Walmart, Target, and Lowe’s. The trio will likely report mixed results, with Walmart growing, Target lagging, and Lowe’s impacted by consumer headwinds. The outlook for the current quarter, which is the all-important holiday shopping quarter critical for most retailers, will drive their share prices and the next move in the S&P 500.

As Market Watch notes, while recent monthly unemployment data released by the Department of Labor have cemented the notion that the jobs market is indeed cooling, this hasn’t stopped consumers from continuing to spend. As a result, the economy remains in robust shape, helping to push Treasury yields higher. Higher borrowing costs are anathema to stock valuations, because they increase the cost of carrying debt for corporations, making it more difficult for them to finance capital investment and, perhaps more importantly, share buybacks. Economic data released this week appear to have reinforced this notion, with Friday’s retail sales data showing consumers continued to spend over the last couple of months. Adding to hopes for an economic revival, a Fed manufacturing gauge of activity in New York State showed an unexpected rebound, showing signs of a life in a corner of the economy that has struggled for years.

And Inflation? Again, from Market Watch, Inflation has slowed a lot in the past two years and is relatively low, but it’s been runner hotter lately than the Federal Reserve would like. The consumer price index rose 0.2% in October for the fourth month in a row. If the CPI rose that much in every month of a year, the inflation rate would be 2.4% annually. The Fed is trying to get inflation down to 2% a year. The core CPI has risen an even stiffer 0.3% in each of the past three months. That would translate into a 3.7% inflation rate annually. The Fed, of course, uses the PCE inflation index as a guide in setting U.S. interest rates, and the PCE is running notably cooler: It’s up just 2.1% in the 12 months ended in September. The CPI feeds into the PCE index, however. So the PCE index might not be able to get to 2% – and stay there – if the CPI continues to show elevated increases.

The housing Market? Barron’s Megan Leonhardt wrote: The rising cost of shelter, one of the most persistent facets of price growth, proved again last month that housing continues to be an inflationary challenge. The Bureau of Labor Statistics’ index for shelter rose at a slower 0.2% monthly rate in September, giving economists some hope that there was finally some progress in housing inflation. But last month, housing inflation was back up to 0.4%, accounting for more than half of the monthly increase in the headline consumer price index, the bureau reported. Compared with a year ago, shelter inflation measured 4.9% in October. Rents rose 0.3% month over month in October, while the bureau’s metric of housing inflation for homeowners—the index for owners’ equivalent rent—was up 0.4% on the month. Lodging away from home, which includes hotel stays, climbed 0.4% in October after falling 1.9% in September. Nonetheless, the overall inflation picture is still trending in the right direction. The Federal Reserve is heavily expected to lower interest rates by a quarter of a percentage point at its December meeting.

So, what looks good? We believe the rate-cutting cycle should create a favorable environment for high-quality bonds, particularly mortgage-backed securities and municipal bonds. These sectors, which are already starting from attractive yield levels, are well positioned to deliver strong price returns as rates decline. This plus value in international stocks and continued value in Small Cap stocks should do well in 2025.

Buckle up because here we go!

Mike