Market Momentum: Your Weekly Financial Forecast & Market Prep

Last Week: Insights & Trends

The U.S. markets were shaped by a blend of political and economic events this past week, setting a strong tone for the coming months. With the U.S. election results confirming a Republican win in the White House and Senate, and an anticipated but uncertain Republican hold on the House, markets began recalibrating to potential policy shifts. The election itself removed a significant element of uncertainty, catalyzing a post-election rally in equities. This rally, alongside the Federal Reserve’s recent decision to cut interest rates by 25 basis points, had substantial effects on various market sectors, including stocks, bonds, and cryptocurrencies.

Key Takeaways from the Election Outcome
Markets were quick to respond positively to the election, pushing the S&P 500, NASDAQ, and Dow to record levels, with gains of 5-6% for the week. The clarity around the election outcome lifted a cloud of uncertainty, which, coupled with hopes for pro-growth policies, led to significant sectoral performance, especially in financial services, energy, and consumer discretionary sectors. Notably, smaller-cap companies and financials surged amid expectations of lighter regulations and favorable fiscal policies. Defensive sectors, including utilities and staples, also saw gains, possibly reflecting an investor preference for stability amid fluctuating bond yields.

Potential Policy Shifts and Market Impact
A central theme in market discussions was the potential for extended tax cuts and deregulation under a Republican-led government. Expectations of a renewed focus on corporate tax cuts and regulatory rollbacks are anticipated to spur corporate spending, benefitting cyclical and domestically focused companies. Conversely, the fiscal implications of these tax cuts raise concerns about inflation and increased debt. The administration’s potentially aggressive stance on tariffs and immigration may further fuel inflation, though a strengthening U.S. dollar might mitigate some of the impact on prices.

Federal Reserve Rate Cut and Bond Market Reactions
The Fed’s decision to cut rates for the second time in this cycle brought the federal funds target range to 4.5% - 4.75%, reflecting a cautious approach towards easing. Chair Powell emphasized that monetary policy would remain steady in response to campaign proposals until they manifest into actionable policy. In the bond market, Treasury yields saw volatility, with the 10-year yield rising briefly midweek before easing post-Fed decision. The bond market, now pricing in a slower pace of future rate cuts, anticipates three more cuts by year-end, down from six expected a month ago. As a result, longer-term rates may settle slightly higher than previously projected, between 3.5% and 4.0%.

Underlying Economic Fundamentals Remain Strong
Despite the political changes, the fundamentals sustaining the U.S. market’s record highs remained robust. Consumer spending, rising incomes, stable employment, and strong corporate earnings continue to bolster economic resilience. Corporate profits are projected to rise in the coming years, with S&P 500 earnings expected to grow from 0.5% in 2023 to 9% in 2024. Interest rates are now likely past their peak, with inflation stabilizing, presenting opportunities for a soft landing. These fundamentals support continued bullish sentiment, which is further enhanced by the ability of U.S. companies to adapt to changing policies.

Opportunities in Equities and Fixed-Income Markets
Value-style investments and small- to mid-cap stocks, which have lagged since the bull market’s inception in late 2022, stand to benefit from broadening market participation, potentially driven by pro-growth policies. While equities look set to gain from tax incentives and deregulation, the anticipated increase in fiscal deficits and debt levels could pressure bonds. Given the attractive yield levels, investors may find value in extending the maturity of their bond portfolios to lock in high yields, especially as short-term rates on cash investments are likely to follow the Fed’s policy rate lower.

Economic Data and Market Sentiment
Investor sentiment received a boost from a strong consumer sentiment index, rising to a seven-month high, and upbeat earnings reports from leading sectors. The University of Michigan’s consumer sentiment data reflected growing consumer confidence in the economy, driven by low unemployment and resilient growth. The sentiment was further supported by solid labor market and productivity numbers, reflecting continued economic momentum.

Cryptocurrency and Alternative Assets
In the crypto market, Bitcoin saw a record high, reflecting optimism that the new administration might adopt a favorable stance towards digital currencies. With cryptocurrency markets rising in tandem with equities, the sector’s growth aligned with investor expectations of regulatory clarity.

Looking Forward: Long-Term Market Fundamentals
With the election behind, attention now shifts to the longer-term market dynamics, including the influence of potential fiscal policies and economic data on future Fed decisions. The upcoming Consumer Price Index (CPI) report, scheduled for release this Wednesday, could offer insights into the inflationary landscape, providing additional clarity on the Fed’s rate cut trajectory. Investors are reminded of the value of a well-diversified portfolio, which can mitigate risks from policy shifts and ensure steady progress toward long-term financial objectives.

Futures Markets