The Dow Jones gained more than 1500 points on Wednesday after Trump won the 270 electoral votes needed to become the 47th President of the United States, and the volume was twice the normal level. By Friday, as shown in the table, all four major indexes closed at all-time record highs. That says something about Wall Street’s view of which candidate’s economic policies were better for long-term economic growth. As of the close of business on Friday (November 8th), for the week, the major indexes are up in the 5%-6% range with the small cap Russell 2000 up more than 8.5%. For that small cap index, the YTD change is just 9%, so almost all of its year-to-date gain came this week!
The Magnificent 7 (NVDA, MSFT, AAPL, AMZN, META, TSLA, GOOG) have also been hot this week with three (NVDA, AMZN, and TSLA) setting new all-time highs, Nvidia and Amazon on Thursday (11/7/24) and Tesla on Friday.
Prior to the election, markets had been flat. This can be traced to the disappointing guidance from Microsoft and Meta. Apparently, the markets feel confident that President-elect Trump’s economic policies will be positive for U.S. businesses. For example, his stated tariff policy would make it easier for U.S. made goods to compete with foreign imports, especially those from China, many of which are subsidized by the Chinese government.
Trump Presidencies – Then and Now
Here is a comparison of some key market and economic data from 2016 (when Trump’s first Presidential term began) to today.
Of note, these critical ratios are much more constraining now than they were back in 2016. For example, the debt/GDP ratio of 123% may act as a constraint on Trump’s ambitions. Of concern is the debt servicing cost. If this pierces 30%, the costs of Treasury debt will rise significantly, and there could be more rating agency downgrades. The fact that the Republicans control the Senate and are likely to control the House of Representatives, would, in the past, indicate a more conservative approach to spending and deficits. That hasn’t been the case of late. We’ll see what happens with this Congress.
The large fiscal deficits during periods of healthy economic growth has a two-fold negative impact: 1) A rising Debt/GDP ratio has consequences for interest rates (i.e., higher than they otherwise would be) with debt servicing costs set to become a major fiscal headache; 2) A rising Debt/GDP ratio could be a threat to the dollar’s world reserve currency status, a status that keeps demand for dollars and Treasury securities high. A loss of such status would surely raise the cost of U.S. Treasury borrowing.
Market Performance Under the 12 Presidents Since 1960
We came across the chart below from the folks at Y-Charts that shows the S&P 500 performance under the 12 U.S. Presidents since 1960. For 10 of the 12, the S&P 500 was higher at the end of their terms than at the beginning. Only under Presidents Nixon and G. W. Bush was the S&P 500 lower at the end of their tenure than it was at the beginning. As noted above, the financial markets have high hopes for a second Trump term.
The Election and Monetary Policy
On Thursday (November 7th), the Fed lowered the Fed Funds Rate by 25 basis points (0.25 percentage points) to 4.50%-4.75%, a move that was widely anticipated by the markets. Of interest was Chairman Powell’s response at the press conference to a question regarding the +2.7% year/year inflation rate as calculated using the Personal Consumption Expenditure Index (PCE), the Fed’s preferred inflation measure. Powell’s response was to refer the audience to the six-month and three-month annualized rates. Both of these are well below the 2% Fed target. That was quite a dovish response. (We note here that in past blogs we have referred to the much lower annualized rates in the three- and six-month indexes; giving us confidence that we would be seeing much lower rates of inflation going forward.)
Also of interest was Powell’s comment that “the labor market is not a source of significant inflationary pressure,” indicating that there are signs of labor market softening emerging in the data. Again, we have noted such in our past blogs.
The surprise of the press conference occurred when Powell was asked if he would step down if asked to do so by President-elect Trump. His response was a short one-word answer with an irritated tone: “NO!” Later in the press conference he indicated that, because the Fed is independent from the Federal Government, under the law, the President could not remove him or any of the other Fed Governors. Note: His term expires in May 2026.
We don’t see this as a big deal. This Powell led Fed had already embarked on an easing cycle in September, well before the election. Given the duration of business cycles, the Fed isn’t likely to raise rates again during the remainder of Powell’s term. So, the only likely point of disagreement between Powell and Trump can only be the speed at which the Fed lowers those rates.
Leading Economic Indicators
The Conference Board’s Leading Economic Indicators (LEI) showed up at -0.5% in September from their August reading. This is the 7th consecutive negative reading. The Index is down -4.8% from a year earlier, and as shown on the chart, that year/year percentage change hasn’t been positive since mid-2022. The Coincident Economic Indicators still showed up as positive (+1.4%), and while that means that the economy is still growing, the Leading Indicators are forecasting that the future road may be rocky. Here’s some food for thought: In January ’08, LEI was -4.9% year/year (quite similar to today’s -4.8%). The Coincident Indicator was +1.5% (again like today’s +1.4%). What happened next? The Great Recession! Further back, in February ’01, the LEI was -5.0% year/year, and the Coincident was +1.7%. Again, a Recession was not far off. Some economists want to write-off the predictive power of the LEI. We’re not in that camp. Let’s not forget the huge fiscal deficits have played a major role, and are likely the major reason why the economy remains in growth mode. As noted above, a continuation of such deficits endangers the dollar’s role as the world’s reserve currency.
Construction Spending
The left side of the chart shows the slowdown in Nonresidential Construction. It is rather dramatic with the year/year percentage change falling from more than 20% in 2023 to 5% late in 2024. On the residential side, the growth rate, which peaked in 2021 at over 30%, is now also at a 5% annual rate. While both are still positive, they reinforce our thesis that the economy’s growth rate is slowing.
The Slowdown
Since the end of September, interest rates have spiked (see chart). This was likely due to the +2.8% growth in GDP in Q3 and the Street’s expectation that such growth would continue. The labor market appears to be weakening, with payroll growth in the Non-Farm Payroll Survey in October at just +12K (and the Household Survey showed -368K with a falloff of -164K in Full-Time positions). Data shows that consumers spending growth has been far beyond their advancement in income. As Herb Stein famously remarked, “Something that cannot go on forever, won’t!” In the May to September period, income grew +1.1%, but spending grew far faster, at a +3.3% rate. The result has been a rapid drawdown in savings. That cannot continue for long. Consumption growth is likely to slow significantly in 2025 and we think that interest rates will come down by 2 percentage points or more, from a 4.5% Fed Funds rate today to the 2%-2.5% range in 2025-2026.
Final Thoughts
From the rise to record levels in the equity markets this week, it is clear that Wall Street was happy with the results of the presidential election. It is also plausible that had Kamala Harris won, the financial markets could have performed similarly. After all, during President Biden’s term in office, stocks are up 50%. Perhaps the rise in the equity markets was just relief that there was a clear winner and that there won’t be days, weeks, or even months of uncertainty and ballot recounts. Also note that three of the Magnificent 7 (NVDA, AMZN, TSLA) also hit record highs this past week (ended November 8th).
During President-elect Trump’s first term, the S&P 500 rose +67%. We presented a table that showed a comparison of significant economic indicators Then & Now. Given the much higher starting points in the Now column, especially the P/E ratio and the rising debt/GDP, a repeat of that 67% growth in the S&P 500 achieved in his first term appears to us to be much harder to achieve over the next four years. But, then again, who thought even a week ago that Mr. Trump would be re-elected so handily?
Per market expectations, the Fed lowered interest rates by 25 basis points this past week. The tone of Fed Chair Powell’s press conference was on the dovish side, as the Fed sees inflation continuing to move to its 2% goal and whose attention is now focused on the labor market. Of interest was Powell’s response to a question regarding the +2.7% year/year PCE inflation rate. Powell’s response was that the six-month and three-month annualized rates were much lower. Quite the dovish response. We also now know that Mr. Powell will remain Chairman of the Fed at least through the end of his term (May ’26).
Prior to the election, the Powell led Fed had already embarked on an easing cycle. That happened in September with the 50-basis point rate reduction. Given the duration of business cycles (measured in years), this Fed is unlikely to raise rates again during Powell’s remaining term.
Meanwhile, the Leading Economic Indicators continue to forecast an economic slowdown (at a minimum), while the macroeconomic data coming from the government agencies mostly say that fairly robust economic growth will continue. We are of the belief that an economic slowdown is underway. We just don’t know yet if it will morph into a Recession.
(Joshua Barone and Eugene Hoover contributed to this blog.)