Weekly Update 11/08/2024: Fed Moves and Markets React After Election Outcome
- Zoetis reports solid sales and raises guidance
- Celanese reports disappointing results
- Boeing ends strike
- McKesson powers higher
- 50 years of dividend increases for ADP
- ISM services in growth territory
The 2024 presidential election has been decided with Donald Trump returning to the White House after a close and years-long race while a watchful global audience focused on how it all will effect the global economy. It is far too early to draw any meaningful conclusions about the course of the market over the next four years after less than a week. History is replete with examples of how initial reactions eventually fade as time passes and new, unexpected developments might change the course of events which seemed so certain at one point. We do not invest exclusively focused on the short term outlook because it does not serve our clients to help them achieve their financial goals which may involve decades of planning. Those clients who have been with us the longest understand that our success has been based on finding the right investments and providing the best advice no matter what direction the political winds may blow.
The knee-jerk reaction of the markets was an interesting dichotomy. Stocks surged on Wednesday most likely because the milieu of uncertainty which has characterized the election since campaigning began was lifted. Markets can embrace good news. Markets can absorb bad news. But markets hate uncertainty which either keeps a lid on equity prices or leads to selling first and asking questions later. Corporations now have a better, more informed idea of what the environment will be going forward which might loosen the purse strings on investments in capital and equipment. Some key government positions may be in play that otherwise would not, opening the door to a more conducive environment for certain events like mergers and acquisitions. Conversely, the fixed income markets traded lower resulting in higher yields across the maturity spectrum. The prospect of higher immediate tariffs is inflationary in the short-term. That is why the dollar gained ground against other currencies in exchange markets because it would be the best currency to generate higher yields. The potential for the tax cuts of 2017 to be made permanent may balloon the deficit without offsetting expense cuts. The prospect of a 25 basis point (0.25%) rate cut by the Federal Reserve at their December meeting went from 83% on Monday to 67% on Wednesday. Part of the market’s rise this year can be attributed to the prospect of multiple rate cuts. If that probability is now reduced, can the equity markets continue to rise? The Fed meeting provided some clues.
Interest Rates
Yesterday, the Federal Reserve lowered its benchmark federal funds rate by 25 basis points to a range of 4.50%-4.75%. The vote of the Federal Open Market Committee (FOMC) was unanimous in contrast to the one dissent that accompanied the last vote in September. The Fed statement began: “Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.” During the post-meeting press conference, Chairman Jerome Powell was asked what affect the election would have on their policies. He stated that the election would have no effect in the short term because it takes time for new policies to take effect. But he was clear in stating: “We don’t guess, we don’t speculate and we don’t assume.” This suggests that he and the rest of the committee are ready to react based on how the economy responds to whatever policies are enacted, but there is neither a pre-ordained plan nor is there any “leaning” in any direction. He said that longer-term inflation expectations appear to remain well-anchored which is good. He also said that though the labor market has cooled from its formerly overheated state, it remains solid which is also good. Stocks reacted favorably to the cut and Powell’s remarks, and we saw some industries which had lagged on Wednesday, rebound in Thursday’s trading session.
So, is the Fed on autopilot now? Should the market just expect rates to steadily decline at the next meeting in December and then throughout 2025? Not so fast. Powell said that the committee is “beginning to think about” slowing the pace of cuts. This is after only 75 total basis points of cuts over two meetings. Some Fed watchers have stated that the Fed may switch to a once-a-quarter tempo once the calendar turns to 2025. In fact, looking at the futures markets while Powell was speaking, the chance of a rate cut at the 2025 January, March and May meetings was 40%, 67% and 38%, respectively, clearly emphasizing that type of pattern. Powell said he would not rule “out or in” a December cut either. The only clear takeaway is that the Fed will be, as they always say, data dependent. The next FOMC meeting is December 18 at which time they will have received more inflation metrics, perused another employment report and seen early results of Black Friday shopping and how holiday consumer sentiment is faring.
Powell and his colleagues have done an admirable job of navigating the economy through the pandemic and the recovery that followed. They have admitted they were behind the curve when inflation erupted in 2021-2022 thanks to a confluence of factors, but, given that this was the first global epidemic for every Fed decision maker, we can give them the benefit of the doubt since they subdued the pricing surge and are closer to their 2% target currently. However, in one sense, the hard part is just now beginning. On the one hand, they cannot move too swiftly else they potentially reignite inflation embers which have not yet completely cooled. On the other hand, they cannot stand still if rates are indeed too restrictive as it would choke away momentum and lead to a downward spiral. It is a delicate balance, with the fate of the world’s largest economy in the balance. No pressure.
Economic Data
With most of the attention on the election and the Fed meeting, there was a light economic calendar this week. Initial jobless claims rose 3,000 to 221,000 in the week ended November 2 according to the Department of Labor. That was in line with the median forecast of economists in a survey by Bloomberg. Continuing claims, which measures the number of people continuing to receive benefits, rose to 1.89 million in the week ended October 26. That was the highest number since November 2021. The effect of storms and labor strikes means it remains difficult to construct a clear trend in the weekly figures.
On a positive note, the Institute of Supply Management reported that its services index rose to 56.0 in October from 54.9 in the month prior. This crushed the consensus estimate of 53.8. This was the fastest pace of expansion in over two years. The gauge of new orders and business activity expanded at 57.4 and 57.2, respectively, suggesting that continued economic momentum will occur into the current quarter. The employment index rose nearly five points to 53, the highest since August 2023, offsetting last week’s weak monthly jobs report when only 12,000 nonfarm payrolls were added. That figure may have been distorted by severe hurricanes and fallout from the strike at Boeing. Next week we will get October’s reading of consumer and wholesale prices and the latest retail sales figures as we approach the most important season of the year for many retailers.
Company Events
SGK writes additional weekly commentary for clients of the firm detailing recent events and earnings of core equity holdings.
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