November 2024 Market Commentary

Elections are (mostly) behind us

• • Seasonality finally caught up to the equity markets in October with declines across all major indices.
• • Economic data and corporate earnings reflect a resilient economy.
• • Breaking down election results and assessing potential policy changes.

The S&P 500 Index's five-month run of positive monthly gains came to an end in October. Non-U.S. markets suffered the most among the major market indices, declining 4% or greater in October. The bond market matched its worst monthly performance of 2024, declining 2.5%, reversing course from a string of five consecutive monthly gains. Eight of 11 S&P 500 Index sectors generated negative results in October, with bright spots coming from Energy, Communications Services, and Financials Services gaining. Healthcare was the worst performing sector, declining 5%.

The Lead up to the Election

Market volatility perked up in October, with the S&P 500 Index experiencing nearly an equal number of up and down days, totaling 11 and 12 respectively.  In contrast, during the prior five-month period, up days outnumbered down days by nearly a two to one factor. Our expectations for a sixth consecutive month of gains were muted entering October, as history suggested weakness lay ahead. Alongside seasonal trends, where average monthly returns for September and October are typically the lowest, the index's impressive 20+% climb over the first nine months of the year seemed ready to pause. While seasonality plays a role in market movements, other factors, including broader economic indicators and corporate earnings, can drive longer-term trends.

The Macro Picture

The S&P Global U.S. Manufacturing Purchasing Managers Index (PMI) is a monthly survey-based economic indicator that gauges the activity of around 600 manufacturers across 19 primary industries. A PMI reading above 50 signifies economic expansion, while below 50 indicates contraction. For October, the PMI reading rose slightly to 47.8 from 47.3 in September indicating a continued contraction in the Manufacturing sector but at a slower pace. Key insights from the October report included a fourth consecutive monthly drop in new orders and a moderated decline in production and employment. While pricing pressures eased and supply chains stabilized, weak demand and cautious sentiment persisted.

September's jobs report, released on October 4, painted a brighter outlook. The unemployment rate dropped to 4.1% and nonfarm payrolls increased by 254,000, well above analyst estimates of 154,000 and August's 142,000 increase. Food Services, Healthcare and Construction saw notable job gains, while the labor force participation rate remained stable.

At the end of the month, the Bureau of Economic Analysis released the Gross Domestic Product (GDP) report for the third quarter. Annualized quarter-over-quarter growth was 2.8%, slightly below the 2.9% estimate and the second quarter's 3.0% growth rate. Consumer spending expanded 3.7%, the most since early 2023, led by broad increases across goods, including autos, household furnishings and recreational items. However, residential investment declined an annualized 5.1%, the most since the end of 2022, as high mortgage rates pressured the housing market.

Corporate Earnings

Shifting to corporate earnings,[i] and with 70% of the S&P 500 companies reporting actual results, the blended earnings growth rate for the third quarter is 5.1%. If that growth rate holds, it will mark the fifth consecutive quarter of year-over-year earnings growth for the Index. Eight of the 11 sectors are reporting year-over-year growth, led by Communications Services and Healthcare sectors. A notable exception is the Energy sector, which is reporting the largest decline in year-over-year earnings. Overall, however, earnings and revenue growth rates have been consistently positive. Looking ahead to the fourth quarter, analysts expect earnings growth to accelerate to 12%.

Election Results

While the third quarter earnings for S&P 500 companies showed mixed results, investors have shifted their focus to the election results. As of the morning of November 6, Donald Trump secured the necessary 270 electoral votes to win the 2024 presidential election. Trump solidified his support in traditionally Republican states, maintaining strong leads in the South and Midwest. He managed to narrow the margins in several traditionally Democratic states and won (as of this writing) five important swing states, Georgia, North Carolina, Michigan, Pennsylvania and Wisconsin. Trump holds a lead in the remaining two swing states, Arizona and Nevada.

Democrats entered the election with a 51-49 edge in the Senate, but Republicans were favored to win control. Republicans did, in fact, win control of the U.S. Senate, flipping three seats (Montana, Ohio and West Virginia). Senate races in Arizona, Nevada and Pennsylvania are too close to call but may result in Republicans holding 55 or 56 seats, ending four years of Democratic control of the Senate.

Republicans picked up one additional seat in the House of Representatives. Of the 47 uncalled races, Republicans need 13 more House seats to secure a majority, while Democrats need 28. The numbers suggest a unified government under Republican control.  Single-party rule in the United States has been rare in the last few decades, occurring just five times since 1980.

Single-party rule gives Republicans a leading role in shaping policy in the nation's capital next year and the ability to confirm judges and executive branch nominees put forward by the Trump administration. Efficiency is gained in legislation and there is clear accountability when one party controls the government. The greater consistency in policymaking in single-party rule can be particularly beneficial for economic and infrastructure projects that require stable, long-term investment, but it is important to note that single-party rule also has potential downsides, such as reduced legislative checks and balances, and limits on political diversity and debate, reducing representation of different viewpoints.

Potential Changes Ahead

With Trump's victory and Republican's control of Congress, investors should expect to see changes implemented across key policy areas, including taxes, tariffs, deregulation and immigration. While uncertainty remains about the details and timing, we provide a few key points communicated during Trump's campaign.

• • Taxes

Trump proposed extending the 2017 Tax Cuts and Jobs Act (TCJA), which includes maintaining lower tax rates for higher-income earners (five of the seven tax brackets were lowered) and corporations. He also suggested reducing the corporate tax rate from 21% to 15% for companies that manufacture their products in the United States. He aimed to eliminate incomes taxes on tips and overtime pay for service workers, as well as on Social Security benefits. In addition, he proposed making interest on car loans tax-deductible. Trump expressed a desire to make the current estate tax exemption permanent ($13.99 million starting in 2025). The TCJA is set to expire at the end of 2025 without Congressional action.

• • Tariffs

To protect American jobs, Trump proposed a 10% tariff on all goods imported to the United States. To counter what he views as unfair trade practices and to encourage domestic manufacturing, Trump also proposed a 60% tariff of goods imported from China. Economists generally agree that tariffs have a mixed impact. The overall economic effect was negative, with estimates suggesting a reduction in U.S. GDP and employment, according to a study conducted by the Tax Foundation.[ii]

• • Deregulation

Trump's deregulation plan is designed to create a more business-friendly environment by reducing compliance costs and encouraging business investment. He spoke specifically about reducing regulations that impact energy companies, financial institutions, insurers and artificial intelligence initiatives. By rolling back regulations, particularly in the energy sector, utilities might face lower compliance costs, potentially leading to lower operational expenses and lower utility bills for consumers. Also, Trump has proposed eliminating what he describes as "unnecessary" regulations that add to the cost of building new homes. 

• • Immigration

Trump has promised a sweeping overhaul of U.S. immigration policy, building upon the strident measures of his first term. Per the plan he shared throughout his campaign, Trump intends to commence mass deportations of millions of undocumented immigrants.[iii] . Trump spoke of using the military for immigration enforcement and conducting workplace raids as a method of identifying and apprehending undocumented immigrants.

At the moment, Trump's policy priorities are unclear. Without the ability to run for a third term, political strategists expect Trump to do his best to follow through on his campaign promises, which may be easier if both houses of Congress are also controlled by the Republicans.

Economic Impact of Policy Changes

The Committee for a Responsible Federal Budget (CRFB) analyzed Trump's tax plans and provided a few key insights. As detailed below, Trump's proposal would add approximately $7.75 trillion to the federal debt balance through 2035, taking debt as a percentage of GDP from 98.5% (today) to 143%.

[iv]

The economic impact would be minimal, according to JP Morgan's Chief Global Strategist, Dr. David Kelly. Kelly believes corporations would likely retain the added net income but may return to shareholders through dividends or share buybacks. With the economy at full employment, there is less incentive to create jobs. However, Kelly sees a big boost to consumer spending if taxes on tip and overtime income and Social Security benefits are eliminated.

Regarding tariffs, Kelly indicated that tariffs tend to push up inflation and invite retaliation. Higher inflation slows global trade, and the broad scope of Trump's policies is inflationary.  As the federal deficit widens and inflation gets a second wind, a higher trajectory of interest rates is likely. Furthermore, the U.S. government will be required to issue more debt, potentially pushing longer-term rates even higher.

Up Next: The Fed

The Federal Reserve is expected to announce a 25 basis point (one basis point equals 0.01%) decrease to the Federal Funds Rate on November 7. We expect the Fed to remain data-dependent, and not to change its monetary policy because of the election outcomes. The futures market is pricing in a 67% probability of a 25 basis point cut in December, and two or three 25 basis point cuts in 2025.

Looking Ahead

Election uncertainty is behind us, but policy uncertainty lies ahead. History suggests that campaign rhetoric does not always match policy. Nevertheless, we do expect meaningful policy action in the new administration's first 100 days. Election aside, the U.S. economy is remarkably resilient. The unemployment rate is at historic lows and jobs have been added at a 150,000 per month pace. GDP is above economic equilibrium, and inflation is at a three-year low. By those measures, the U.S. economy is doing just fine. We remained focused on the long-term but are prepared for short-term disruptions. The capital markets experienced significant reactions to the election results the day after the vote, with U.S. equity markets gaining 3% and rates on U.S. Treasury securities jumping between 10 and 17 basis points across the yield curve. We believe risk management is paramount to long-term investing success and is best implemented through appropriate diversification to protect against unknown risks.

We appreciate your confidence and support and encourage you to reach out to an Old Point Wealth Management team member with any questions.