Key Points:
- Former President Donald Trump will serve a second term with GOP Congressional leadership.
- US stocks soared after the election while international stocks fell on US Dollar strengthening.
- Bonds moved higher during the month but continue to lag stocks for the year.
After a long and drawn-out election campaign, U.S. risk assets moved higher in November following a decisive victory for republicans. President-elect Trump will serve a second term with GOP control in both the Senate and House of Representatives. Heading into the election, nervous investors worried about the prospects of a delayed presidential winner among tight polling. Stocks rallied on the results. The S&P500 and Dow Jones Industrial Average had their best months of the year, gaining 5.87% and 7.74%, respectively. Small caps surged almost 11% on the prospects that a GOP sweep would lead to lower regulation, more mergers and acquisitions, and increased domestic manufacturing from deglobalization.
Consumer Discretionary stocks were the best performing sector, up 13.3% followed by a 10.3% gain in financials, who should continue to benefit from lower future interest rates. Industrials grew +7.5% as tariffs could lead to more domestic manufacturing and production. Valuations are relatively high in growth stocks, specifically those tied to Artificial Intelligence.
The Federal Reserve cut their benchmark Fed Funds rate an additional 25 basis points in November with another potential cut in December. While short-dated Treasury yields moved lower, longer maturity yields stayed high as tariff talks have reignited inflation concerns. Bonds traded higher during the month with the Bloomberg US Aggregate Bond Index gaining 1.06%. International stocks fell during November with the US Dollar strengthening against other major currencies.
Heading into 2025 the US economy looks to avoid a recession, and the Fed is likely to continue its easing policy (cutting interest rates). This backdrop along with a healthy labor market could be a good environment for equities, but US Large Cap growth stock valuations are elevated compared to long-term averages. Investors should resist the temptation to chase returns in the Magnificent 7 stocks and remain diversified as a broadening out in some of the lagging (cheaper) cyclical sectors of the market could take leadership from the mega cap growth companies, which have driven the market higher in the past two years. The 10-year Treasury yield rose during the month, as inflation expectations moved higher. Strong economic growth may cause inflation to stay higher for longer and limit the Fed’s ability to aggressively bring down rates. The increase in longer term yields pushed mortgage rates higher, despite the Fed’s goal to bring rates down. The US housing market has an imbalance in supply and demand. Due to the lack of supply, higher home and rental prices may keep inflation elevated and away from the Fed’s 2% target. The jump in long rates hurt existing bonds and pushed the Bloomberg US Aggregate Bond Index to fall 2.48% in October. continued escalation in the Middle East, increased demand from China from stimulus, rising energy prices and strikes along US ports. The US election seems to be a tight race, adding additional uncertainty to the markets. Heightened volatility in stocks and bonds for the rest of the year should be expected.her than longer ones. Cash investors are enjoying higher yields, but for how long remains uncertain.
Sources: Morningstar Direct, T.Rowe Price, PGIM, Wall Street Journal