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Upgrade to Premium Policymakers don’t want to tank the stock market Sam Ro · Contributor Sun, Nov 10, 2024, 11:23 AM
A version of this story first appeared on TKer.co
Stocks surged after election results came in and the major news outlets declared former President Donald Trump the winner.
At least some of the rally can be explained by the removal of election uncertainty.
At the same time, the strength of the market response has arguably been at odds with what many economists consider the prospect of worse economic policies under President-elect Trump.
Maybe it’s traders and investors betting that policies bad for the market won’t actually be implemented. After all, what president would want to be affiliated with wealth destruction caused by falling stock prices?
This is an idea that was floated by Bloomberg’s Joe Weisenthal in Thursday’s “Odd Lots” newsletter:
Whereas bond market vigilantes are characterized by what they want to avoid (inflation), stock market vigilantes actually want something: higher profits. And also the higher the profits the better. Furthermore, the stock market is an important driver of wealth for millions of American households, and that also means an important driver of wealth for millions of American voters. When the stock market is down, people feel bad. When it’s up people feel good. If you’re an American politician (or President specifically), you’re forced to be sensitive to this in a very direct way if you want to be elected. It’s not really the same with bonds. The policy-markets nexus is just tighter with stocks..
While there are many aspects of the economy (like inflation and employment) that can be tricky to define and measure, stock prices are very unambiguous. People’s investment portfolio values are regularly updated down to the penny.
I’d add that those voters with money in the stock market include the many billionaires with whom the incoming president has gotten cozy. And much of these billionaires’ wealth is tied up in the stock market.
Republican presidential nominee former President Donald Trump speaks at an election results watch party as his commanding victory over Kamala Harris is apparent on Wednesday, Nov. 6, 2024, in West Palm Beach, Fla. (AP Photo/Ted Shaffrey) · ASSOCIATED PRESS
Assuming the president does not want to be associated with destroying the investor class’ wealth, this means his administration will likely think twice about going all-in on policies that could prove costly to the companies in the stock market. More from Joe:
This probably puts a constraint on populist, anti-market interventions. You saw this when the trade war with China started heating up under the first Trump administration, and there were days when the market’s reaction was sharply negative to the headlines. Those tariffs didn’t have a massive economic impact, and they didn’t have a massive market impact. But it seems reasonable to think about what a much more aggressive tariff regime would have on equities.
Fortunately, policies don’t necessarily have to be enacted for the stock market vigilantes to intervene.
The legislative process is an onerous one. And all along the way, there are usually leaks about how policy proposals evolve and advance. For the proposals that matter to markets, the stock market vigilantes will adjudicate any developments in real-time by bidding prices up and down.
This means that harmful trade policies might actually never see the light of day if the stock market sends a strong enough signal, and the president is paying attention.
Because who would want to be remembered for being one of the very few presidents who was in office when the stock market fell?
Conflict of interests or aligned interests?
I’m not sure speculating on the financial interests of policymakers, their billionaire backers, and their voting base is a bullet-proof strategy.
It sure sounds like a reasonable one though.
Being exposed to the stock market regardless of whom you voted for has historically been a good idea — and when you are exposed to the stock market, your financial interests are essentially aligned with those calling the shots because they are politically exposed to the stock market (and the economy).
Now to be clear, just because policymakers intend to bolster stock prices doesn’t necessarily mean they’ll be successful at it. Maybe President Trump, regardless of the policy landscape, sees the stock market fall during his term.
The good news is that cumulative returns for investors who are able to put in the time tend to be favorable, even when you are exposed to the stock market during a four-year stretch when prices fall.
Review of the macro crosscurrents
There were a few notable data points and macroeconomic developments from last week to consider:
Fed cuts rates again, as expected. The Federal Reserve announced its second consecutive interest rate cut. On Wednesday, the Fed lowered its benchmark interest rate target range to 4.5% to 4.75%, down from 4.75% to 5%.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the central bank said on Thursday in its monetary policy statement. “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% objective but remains somewhat elevated.”
As we’ve been discussing for most of this year, I think this whole matter of rate cuts is not that big of a deal. Yes, monetary policy matters, and it can move the needle on the economy. But monetary policy decisions are much more consequential, market-moving events during times of stress or crisis in the markets or the economy.
Consumer vibes improve. From the University of Michigan’s November Surveys of Consumers: “Heading into the election, consumer sentiment improved for the fourth consecutive month, rising 3.5% to its highest reading in six months. While current conditions were little changed, the expectations index surged across all dimensions, reaching its highest reading since July 2021. Expectations over personal finances climbed 6% in part due to strengthening income prospects, and short-run business conditions soared 9% in November. Long-run business conditions increased to its most favorable reading in nearly four years. Sentiment is now nearly 50% above its June 2022 trough but remains below pre-pandemic readings. Note that interviews for this release concluded on Monday and thus do not capture any reactions to election results.”
Weak consumer sentiment readings appear to contradict resilient consumer spending data.
Card spending data is holding up. From JPMorgan: “As of 29 Oct 2024, our Chase Consumer Card spending data (unadjusted) was 1.7% above the same day last year. Based on the Chase Consumer Card data through 29 Oct 2024, our estimate of the U.S. Census October control measure of retail sales m/m is 0.59%.”
From BofA: “Total card spending per HH was up 0.9% y/y in the week ending Nov 2, according to BAC aggregated credit & debit card data. Within sectors we report, online electronics, entertainment, transit & airlines showed the most y/y decline since last week. Furniture, department stores and home improvement showed small increases on a y/y basis since last week.“
Unemployment claims tick higher. Initial claims for unemployment benefits rose to 221,000 during the week ending November 2, up from 218,000 the week prior. This metric continues to be at levels historically associated with economic growth.
Wage growth is cooling. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in October was up 4.6% from the prior year, down from the 4.7% rate in September.
Labor productivity inches up. From the BLS: “Nonfarm business sector labor productivity increased 2.2% in the third quarter of 2024, the U.S. Bureau of Labor Statistics reported today, as output increased 3.5 percent and hours worked increased 1.2%. … From the same quarter a year ago, nonfarm business sector labor productivity increased 2.0% in the third quarter of 2024.”
From BofA: “Most of the recent growth is likely a function of pandemic normalization, but increased new business formation and investment could make it sustainable. A sustained pickup in productivity would mean trend growth could stay elevated as the tailwind from labor supply fades and a higher r*.“
Gas prices tick lower. From AAA: “Faced with a rare November hurricane churning in the gulf, the national average for a gallon of gas only fell by three cents since last week to $3.10.”(Source: AAA)
Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.79%, up from 6.72% last week. From Freddie Mac: “It is clear purchase demand is very sensitive to mortgage rates in the current market environment. As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10%.”
There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
Business investment activity ticks higher. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.7% to $74.1 billion in September
Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.
Supply chain pressures remain loose. The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — ticked lower in October and remains near historically normal levels. It's way down from its December 2021 supply chain crisis high.
Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday rose eight tenths of a point last week to 62.1%, about one point shy of the 63% high reached at the end of January 2024. New York and Houston both experienced record-high post-pandemic occupancy last Tuesday, reaching 68.8% and 72.6%, respectively. Dallas nearly hit its record high as well, rising 2.9 points to 70.7%. The average low across all 10 cities was unchanged from the previous week, again on Friday at 32.9%.“
Services surveys look great. From S&P Global’s October Services PMI: “The US service sector notched up another strong performance in October, helping offset the current weakness of the manufacturing sector to drive a solid pace of overall economic growth again at the start of the fourth quarter. The services economy's consistently impressive growth in recent months has helped the US outperform all other major developed economies. October's strong performance is consistent with GDP continuing to rise at an annualized rate in excess of 2%.”
Similarly, the ISM’s October Services PMI signaled growth.
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than hard data.
Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.5% rate in Q4.
Putting it all together
The outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.
To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
A version of this story first appeared on TKer.co
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