SHOW ME THE MONEY

 

 

The U.S. stock market surged following the election, with notable gains in sectors like financials, cryptocurrency, and small-cap stocks. As the political uncertainty fades, attention turns to key policy issues that will shape the economic landscape in the coming months. Here’s a look at the main takeaways from the post-election market shift and what investors, and retirees, should watch for as we move into 2025.

 

Once the votes were tallied, the markets experienced a strong rally. As I said, financials, crypto, and small-cap stocks were among the biggest beneficiaries, with investors betting on deregulation, tax cuts, and increased mergers and acquisitions under the new administration. Historically, these sectors tend to perform well when there’s optimism around business-friendly policies, which includes lower taxes and reduced regulatory burdens.

 

The markets have moved from the uncertainty of politics to the substance of future policy. Key areas of concern for investors will include the deficit, the Federal Reserve’s interest rate policy, and tax policy. These factors will have a significant impact on corporate profitability and economic growth.

 

One of the major uncertainties is the potential impact of Trump’s proposed fiscal policies, which include tax cuts and deregulation. While these measures could boost corporate profitability, they also come with the risk of increasing the national deficit and fueling inflationary pressures. This backdrop has contributed to a rise in long-term bond yields, which are now at their highest levels in some time. The inflationary effects of these policies could delay the Federal Reserve’s efforts to cut interest rates, especially if higher deficits and potential tax cuts lead to greater inflation.

 

 

 

 

Despite significant political instability abroad, markets have remained resilient. Volatility has remained relatively low compared to previous presidential election years, with investors showing confidence that the outcome would not significantly disrupt the market’s long-term trajectory.

 

Leading up to the election, polls and betting markets gave Trump a slight edge, which caused investors to shift their focus toward sectors that would likely benefit from his policies. Financial and energy companies, and companies focused on reshoring manufacturing were among those expected to gain from a Trump presidency.

 

Goldman Sachs analysts identified certain U.S. equities that could outperform under both Republican and Democrat administrations. They grouped these companies into “policy baskets,” which allowed them to track how market sentiment shifted as the election approached. This basket approach highlighted how, as confidence in a Trump victory increased, sectors aligned with his policy agenda outperformed those aligned with a potential Harris administration.

 

Bond markets also saw a shift in the lead-up to the election. Long-term bond yields began rising in September, shortly after the Federal Reserve cut interest rates. The 10-year Treasury yield has since climbed by seventy basis points, driven by expectations of robust economic data and potential inflation. The morning after the election, the 10-year yield rose by fifteen basis points, mirroring the reaction to Trump’s victory in 2016. By the end of the week, yields returned to pre-election levels, showing the market’s sensitivity to political outcomes.

 

One of the most pressing concerns is the growing deficit. Trump has proposed tax cuts and a pro-growth agenda that could increase the deficit, which currently stands at 6.3% of GDP. Projections suggest the deficit could remain elevated in the coming years, particularly if key provisions of the 2016 Tax Cuts and Jobs Act are extended. 

 

Additionally, Trump’s proposal to further reduce the corporate tax rate from 21% to 15% could add to these fiscal pressures. These policies could keep long-term bond yields elevated and create challenges for smaller companies that rely on borrowing.

 

 

 

 

Markets are watching the Federal Reserve closely. As of early November, there is a 65% chance that the Fed will cut interest rates by twenty-five basis points in December. However, recent inflation data has been higher than expected, and Fed Chair Jerome Powell emphasized that the central bank will continue to assess economic data on a meeting-by-meeting basis. If inflationary pressures persist—driven in part by tariffs, tax cuts, and deficit spending—the Fed may slow its pace of rate cuts, keeping rates higher for longer than previously anticipated.

 

With the Republicans maintaining control of the presidency and both houses of Congress, there is a strong possibility that the Tax Cuts and Jobs Act will be extended, and additional tax cuts may be introduced. However, further reductions in the corporate tax rate or changes to taxes on wages, tips, and social security could face opposition, making tax policy one of the key battlegrounds in the coming months.

 

In the aftermath of the election, the market’s focus has shifted back to economic fundamentals. Investors can now turn their attention to the underlying drivers of corporate profitability, including the fiscal policies that will shape the economic landscape. The fundamental drivers of returns—business performance and economic health—remain front and center.

 

It’s crucial investors keep an eye on key policy changes, as they’ll have lasting implications for the markets. 

 

Until next time, invest wisely and — as is my mantra — retire on Your Terms!

 

 

 

Marc Goldstein, our Finance Editor, is a nationally known Financial Educator and Retirement Wealth Specialist, who helps people protect and pass on their wealth.

 

https://www.mgoldsteinassoc.com/