A monumental shift occurred in November, as consumer sentiment, interest rates and equity markets all increased with growth expectations settling in.
Infrastructure spending, manufacturing, a friendlier regulatory environment, trade agreements and fiscal stimulus have become the primary objectives of the president-elect.
A shift towards fiscal stimulus, as proposed by the incoming administration, is expected to help ease the burden on the Federal Reserve. Fiscal stimulus creates higher wages and spending by means of lower taxes, eventually leading to inflationary pressures, which is one of the Fed’s objectives.
Equity markets rallied in November, with the Dow Jones Industrial Index breaching the 19,000 level - a record high for the index. The Dow Jones Transportation Average climbed 11 percent for the month, its single largest monthly gain since October 2011. As a leading indicator of economic growth, strong gains in the transportation index are often indicative of improving economic conditions.
A byproduct of rising rates in November, stemming from optimistic economic growth forecasts, led to a considerably stronger U.S. dollar. The challenge for the new administration will be harnessing the dollar’s strength for U.S. imports while finding ways to make U.S. products affordable in the world marketplace.
Markets are closely watching President-elect Trump’s cabinet appointments, since several are instrumental in orchestrating the direction of various industries, taxes, regulations and economic growth. (Sources: Fed, OPEC, Reuters, BLS)
Many analysts believe the stock market rally following Trump’s election reflects the expectations of a new era of fiscal stimulus. Both economists and analysts agree that the Fed has basically exhausted all its stimulus efforts by means of using traditional and newly devised monetary policy tools that are now considered ineffective.
Small caps outperformed large caps following the election, primarily driven by the growth factors expected to benefit small cap stocks. Proposed corporate tax rate cuts also favor small caps, which benefit more than large caps from tax rate reductions. Proposed deregulation is good for small caps, as large caps can handle higher costs of regulation easier than small caps, leaving small caps to benefit the most under deregulation.
Protectionism is expected to benefit small company stocks, which typically generate less than 20 percent of their sales overseas, while larger company stocks generate well over 30 percent from overseas sales. A reduction in the corporate tax rate to 15 percent would be much more beneficial for small company stocks, which generally don’t have the resources to bring tax rates below 35 percent.
The Dow Jones Industrial Average rose 5.4 percent in November, while the S&P 500 Index increased by 3.4 percent and the Nasdaq Composite added 2.6 percent for the month. The Dow Jones Transportation Average climbed 11 percent in November, its single largest monthly gain since October 2011. As a leading indicator of economic growth, strong gains in the index are often a good sign for the U.S. economy. (Sources: S&P, Dow Jones, Bloomberg)
Bond markets reversed their long-term trend of descending yields, as economic growth expectations and inflationary pressures mounted. The anticipation of lower taxes sent demand for municipal bonds down.
A primary reason for buying munis is the tax benefit of municipal interest, thus resulting in a drop in muni prices in November. High-yield corporate bonds enjoyed a generous run up in November, as optimism regarding economic growth and jobs tend to benefit high-yield bonds.
High-yield bonds are issued by companies considered less credit worthy and more at risk for default. The same companies that issue these bonds tend to prosper in a growth environment, thus generating greater profitability and increasing the likelihood of paying their bond obligations.
The 10-year U.S. Treasury yield ended November at 2.37 percent, up from 1.87 percent before the election and 1.37 percent in July after Britain’s vote to exit the European Union. Even as U.S. Treasuries have fallen in price during this yield increase, they are notably the highest-yielding government bonds among developed countries.
Such a disparity may attract new buyers in search of yield resulting in higher prices and yield constraint. The forces affecting the U.S. bond markets are global, as U.S. debt from various sectors look attractive yield wise as well as conservative relative to higher yielding emerging market debt. (Sources: Bloomberg, U.S. Treasury Dept.)
OPEC agreed to cut production among its 13 members by 1.2 million barrels a day from the current 33.6 million barrels. The agreed upon reduction would reduce global output by about 1 percent, easing high levels of supplies.
Domestically, the U.S. Energy Administration reported that U.S. stockpiles of oil shrank by 884,000 barrels in the final week of November. The price of WTI, the benchmark for domestic crude oil, ended November at $49.17 per barrel.
Since supply and demand are the primary determinants in setting oil prices, OPEC’s production cuts along with less supply in the U.S. are expected to shore up the price of oil. In addition, the anticipated growth generated from any economic expansion in the U.S. and abroad may increase demand for the commodity, adding pricing pressure as well. The crude oil benchmark WTI was up over 50 percent at the end of November from January 2016.
Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.
Emma Dill - Nov 27, 2023
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