Post Election Market Analysis
The 2024 U.S. elections are now behind us and as usual, about one-third of the electorate is happy, one-third is unhappy, and one-third couldn’t care less as they didn’t bother to participate in the electoral process. While there were some House and Senate races that needed a couple of weeks to sort out, thankfully the presidential election result was clear from day one. There was no need for recounts or Supreme Court rulings to figure out who prevailed. Of course, the stock market loved it. In short order, the S&P 500 index jumped 3% to an all-time high. However, the bond market and most commodity markets did not share the same enthusiasm as the stock market.
As we have written in previous newsletters, the stock market doesn’t care whether a Democrat or a Republican occupies the White House. Life always goes on, perhaps with some minor portfolio adjustments towards the sectors favored by the policies of the prevailing party. On the other hand, stock market participants don’t like the uncertainty surrounding who will occupy the White House, because they cannot figure out what are the appropriate adjustments to their portfolios— A clear election result takes the uncertainty away.
Government elections can be seen as a form of an auction, where candidates are auctioning to the highest bidders, either future tax revenues (in the form of subsidies or tax cuts) or favorable regulations, or both. Economists use the term “winner’s curse” to describe how the winner of a well-publicized and well-attended auction for an item (art, antiques, real estate etc.) ends up overpaying for the item. For instance, winning a Sotheby’s or Christie’s auction, which is streamed online allowing bidders from around the world to submit bids in real time, demonstrates that no one else in the world believes the item is worth what the winner agreed to pay for the item. The auction bidding process ensures the maximum payout for the seller at the expense of the winner.
The same “winner’s curse” concept also applies to presidential elections. Come January 20th, the President Elect will become President and assume the responsibility of addressing the nation’s daunting list of problems. Here’s a list of pressing problems the President Elect fought so hard for the opportunity to deal with:
Conflict between Ukraine and Russia entering its 3rd year and threatening to escalate into nuclear war
Conflict in the Middle East between Israel, Hamas, Hezbollah, Iran, and Yemen
$36 trillion federal government debt, growing by $1 trillion every 100 days
$2 trillion federal budget deficit
$7 trillion in commercial real estate (bad) loans residing in bank and pension fund portfolios
Unaffordable residential real estate market, with prices up 40% in the last decade while income is up only 13%
First time home buyers have fallen to a 43-year low at only 24% of buyers
Overvalued stock market, with market capitalization twice our Gross Domestic Product
Persistently higher inflation rate than the Federal Reserve’s target rate of 2%
Deteriorating labor market with 1.908 million continuing unemployment claims
Social Security trust fund projected to exhaust its funds by 2033 (sooner if we hit a recession)
Economy dependent on processor chips produced mainly in Taiwan (even if designed in the U.S.)
Estimated 14 million illegal aliens who are draining the resources of cities, public schools, and hospitals
While we understand the stock market’s relief rally from the standpoint of a conclusive election, as well as investors’ optimism about the potential benefit on business profitability that the new administration’s agenda of tax cuts and deregulation can have (“Trump pump”), we remain skeptical of the ability of any administration to waive a magic wand and solve the above-mentioned problems our economy faces. It is quite possible that after a few weeks of investor euphoria, reality will set in, and exuberance will give its place to disappointment (“Trump dump”). In fact, we can find four past instances in the last one hundred years of U.S. history, where Republican Presidents came to office with similar agendas to President Elect Trump. Hoover-1928, Nixon-1972, Reagan-1980, and Bush-2000, all promised to implement tax cuts and de-regulation. In each case, after a brief post-election rally, the stock market declined 20% to 80%. This doesn’t mean the stock market will do the same this time around. All it means is that we better not follow the herd off the cliff by paying sky-high prices for some companies that traded at half the current price just a few short weeks ago.
We are also skeptical about the bond market’s reaction to the election. Bond prices went down as investors interpreted a Trump administration as ‘highly inflationary’ due to the promised tax cuts and tariffs on Chinese goods. Once again, this seems to be an overreaction from investors. For one, the proposed tax cuts are not a new policy. These tax cuts were introduced during the previous Trump administration, and they are still in effect but are set to expire in 2025. The new Trump administration simply promises to extend these tax cuts for more years. As for tariffs on Chinese goods, if implemented, they have the potential to raise prices of consumer goods significantly. We say “if implemented” because President Trump used the same strategy during his first term in office to negotiate mutual tariff reductions between the U.S. and China. It is entirely possible a new negotiation will reduce tariffs on both countries again.
While the extension of the tax cuts and the proposed tariffs are inflationary by nature, there are also deflationary forces countering them. For instance, the proposed Department of Government Efficiency (DOGE) aims to eliminate some of the 428 federal government agencies, which will necessitate the reduction of the number of federal employees. We do not know how many of the 23,470,000 federal jobs could be eliminated, but job losses are naturally deflationary. Furthermore, any savings from trimming the federal government payroll could offset the future loss of tax revenue from the extension of the tax cuts. Therefore, it is also entirely possible that the budget deficit may shrink, which could lead to a bond rally and lower interest rates ahead. Keep in mind however, that ‘DOGE’ is not a government entity. It has only advisory capacity to recommend reforms to Congress, which will have to decide which recommendations to follow, if any, and to what extent.
The point we want to make here is that it’s impossible to know before hand how effective the second Trump administration will be at implementing its campaign promises, or in addressing the pressing problems of our nation and our economy. The early reactions of the stock market (up) and the bond market (down) are just that, early. History suggests both could easily be reversed as reality sets in. There is no reason to chase hype and euphoria at this time. Warren Buffet’s advice of “being fearful when others are greedy” cannot be emphasized enough, particularly when the U.S. stock market is more expensive than at any previous moment in history, including the 2000 dotcom bubble and the 1929 bubble.
Regarding the stock and bond market performance going forward, we will get more clarity as the new administration takes shape and as we approach the inauguration. Until then, we expect the investment environment to remain quite volatile and speculative as greed reaches a crescendo and investors try to front run what the new administration may do.
At Fierce, we are always looking for opportunities in good businesses at good valuations. At the moment, some of them are international companies and U.S. investors are currently neglecting them. We believe they can offer tremendous potential compared to the pricey alternatives of U.S. companies. We also like treasury bonds at this time, as we expect interest rates to move lower in the coming 12 months.
Stay tuned for our year-end market recap and economic analysis…
We hope everyone has a great Thanksgiving holiday!
Stay Fierce!
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