On November 6th, Republican candidate Donald Trump won the 2024 presidential election, Republicans obtained control of the Senate and held onto control of the House of Representatives. On November 7th, the Fed cut the Federal Funds rate by 25-basis-points to 4.50%-4.75% after cutting by 50-basis-points on September 18th. As a result of the events on those two consecutive days, the stock market indices surged to new highs in anticipation of lower taxes and looser regulations.
In our view, the President-elect will inherit an economy that is out of balance in several areas. While his proposed economic plan aims to reduce inefficiencies and increase tariffs on Chinese imports—potentially helping reduce the deficit—his tax cuts could put upward pressure on inflation, further complicating the economic landscape. The incoming administration faces a delicate challenge. With interest rates already elevated, any push for tax cuts will require offsetting measures, likely involving spending reductions. At the same time, key economic indicators are showing signs of strain.
Wages & incomes are growing at a slower pace than consumption, which is unsustainable over time, especially when combined with rising credit card delinquencies. The trend in continuing claims suggests that it is becoming more difficult to find jobs. Manufacturing production has been moving broadly sideways. At the same time the stimulus from capital expenditure is fading as investors are now demanding a return on investment from the AI build-out. The housing market continues to face challenges. After the Fed cut rates, we saw longer-dated yields rise putting upward pressure on mortgage rates. Within housing, both buyers and sellers have been locked out of the market due to higher rates and higher home prices. The economy is strong on the surface, with robust GDP and historically low unemployment rates, but the underpinnings suggest the economy lacks momentum. So, while we don’t expect the economy to fall into recession, we do believe that some of the extreme optimism around strong growth may be overdone in the near term.
The Fed’s stated dual mandate of price stability and maximum employment is now balanced, according to Chair Powell and he has communicated that they’re prepared to adjust their pace and destination as the outlook evolves. At the same time, we are currently in a period where a lot of economic data has been subject to significant revisions, particularly in the employment figures. Chairman Powell’s mantra of being “data-dependent” and not providing forward-looking guidance has made markets highly reactive to every piece of economic data, leading to more volatility and a consensus narrative that’s constantly shifting. This year alone, we’ve seen dramatic shifts in market expectations. The consensus has gone from a hard landing to no landing to soft landing and now re-acceleration. In January, Fed futures were pricing in rate cuts at nearly every FOMC meeting this year. At present, we’ve had two rate cuts totaling 75 basis points, with the odds of a December pause increasing. This kind of shift highlights an important discipline of ours: we don’t try to front-run the Fed’s moves. Instead, we take our cues from the market, adjusting our positioning as market conditions evolve, not market narratives.
Given the uncertainty around both fiscal policy implementation and the path of monetary policy, our strategy will be to stay vigilant, avoid chasing short-term market trends, and focus on the longer-term economic trajectory. We believe we’re entering a more challenging phase, where fiscal capacity is more limited and structural imbalances in the economy could lead to slower growth.
Source: CNBC
By Veronica Fulton, CFA, Associate Portfolio Manager
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