Highlights:
- The S&P 500 rose 5.9% in November, marking the year's largest monthly gain, driven by optimism about the new administration's business-friendly policies on corporate taxes and deregulation.
- While the election eased concerns over expiring tax codes, it introduced uncertainties around policy actions, including immigration, tariffs, and government agency cuts.
- Small cap stocks led domestic performance, with the Russell 2000 gaining 11.0% in November, while international indices declined, underscoring U.S. economic leadership.
- The Fed is expected to lower interest rates further, balancing inflation concerns with full employment.
The stock market seemed to breathe a sigh of relief with the end of election uncertainty and responded with a strong upward move. The S&P 500 Index advanced 5.9% in November, taking the year-to-date total to 28.1%. This was the biggest monthly gain of the year. Powering the advance was a consensus that the new administration would be business-friendly with regard to corporate taxes and deregulation. The election also helped resolve concerns over the end of the current tax code passed during the first Trump administration, which expires late next year. One possibility is a lower corporate tax rate, which projections show boosting S&P 500 earnings by 4-5%.
Ironically, the conclusive election returns triggered another set of uncertainties: the extent to which election promises and threats would become actionable policy. At the top of the list: the status of resident immigrants and tariffs. Mass deportations and high tariffs could be both economically disruptive and likely inflationary. On another front, while everyone is in favor of increased government efficiency, the prospect of wholesale cuts to government agencies could create waves of unintended consequences. As investors mulled over these possibilities, one beneficiary was small-cap stocks. The Russell 2000 advanced 11.0% in November, leading all major domestic indices. International indices were broadly lower, emphasizing how the U.S. economy continues to lead the world's developed nations.
We can enjoy these market moves while retaining our concerns about future risk. Should these market levels hold through December, it will be two 20%-plus years in a row. History has shown the year following such periods to be more challenging. In terms of basic metrics, stock prices are rising faster than earnings, which means continued stretching of valuations. The new administration will inherit inflation well below recent highs and solid employment. However, other aspects of the economy are more challenging, such as manufacturing, which improved in November while remaining in contraction.
The Federal Reserve appears poised to drop interest rates another quarter point in December. We see the Committee shifting its primary concern from inflation to a more balanced focus with its second mandate, full employment. Job vacancies have moved steadily downward from an early 2022 peak. The first measure of post-election consumer sentiment showed an increase from October. The survey also highlighted the partisan gap in expectations, with Republicans being considerably more optimistic. Expectations for holiday spending are positive, with a 2.5%-3.5% increase projected. Underlying this trend is the concerning level of credit card debt, which recently hit an all-time high.
As the complications of the new government as well as the widely divergent sector results in November (Consumer Discretionary 12.8%, Health Care 0.3%) portend, the prospects for companies in 2025 and beyond look to have skewed potential. We believe this will be a period where careful active management of portfolios can be particularly rewarded.