Navigating Post-Election Market Dynamics
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Unless anthon's and i'm happy, Jones. And this is on investing in a ritual podcast from to while each week we analyze what's happening in the markets and discuss how IT might affect your investments.

Look a morning's zam. This is the morning after the election. We've both, I know, been up and communicating for several hours now. And at first, we didn't think we'd have much news on the election.

That was our assumption as IT would take several days to figure out who won the presidency in the various house is congress. But in fact, we we have a lot of information now, certainly on the presidency in the senate. So uh, big week, obviously.

In addition, we get the federal reserve meeting. So a lot to talk about. What is IT that is going through your mind right now?

yeah. So obviously, the reaction in the equity market is massive. And you if you wanted to point to, I don't want to say, fundamental reasons for IT, but perceptions around policy reasons for IT, I guess you could point to the possibility of lower corporate taxes, a more lax regulatory backdrop, perception of a process wth policies.

But you know, in your world then certainly going going to want you away. And because our worlds are very connected, especially these days, I think that the move up in you this is also a function of concern about terror policy and inflation, which that in of itself would not be a positive backdrop for equities. That said, you've got the dollar searching as well.

And O, L, equal, a stronger dollar is earnings negative. So that's another offset to some of these other perceived positive. So it's oddly a bit of cross currents for the equity market, but the equity market is charging ahead, at least for now. For me on a day like today, not that i'm forecasting some inter day reversal, but these are the kinds of days where you want to sort of stay tuned throughout the entire trading days because some, some pretty funky things have happened in the past when you either get a big, big, big starting gain or a starting drop. So that's what i'll keep an eye on, but you can you and I had exchange this morning before markets opened in, before some people were up about the fed meeting on thursday. And would this potentially move the needle from what is still very much unexpected twenty five basis point cut? So i'm going to toss them back to you broadly on what you thinks going on in the bond market, but would love your thoughts on the fed meeting as well.

Yeah, is we've talked about the bond market has really sent yield sharply higher in response to those expectations that we're going to get expanded fiscal policy, the economy that's already running at a pretty healthy rate and is pretty close to for employment of the attack cuts and perhaps other programs and the risk of inflation due to terrace. And again, all of this is very unknown. We don't know what policies will actually get implemented.

We don't even know yet the composition of congress to a full extent. So betting on policy now is really risky business. But I think the market has to Price in a greater st than expected, that inflation is higher than we had expected or at least we get a bit of an inflation and hit via the terrace.

And that fiscal policy will be more expansion ary, which would probably raise the deficit and increase the risk of more inflation down the road. So that to the markets trying to Price in. When I look at what the bond markets doing right now, still pricing in a rate cut at this meeting on thursday, which I think is realistic, but a shallower path of rate cuts going forward, and that's reasonable if we don't get the kind of decline and inflation from here that expected.

I look at see the break even rates and tips and treasury inflation protected security market. And that's a market where you can look at the break even rate, the yield between nominal treasuries and the inflation protected securities and imply what the market is pricing in for inflation over the time period of that bond. And what we're seeing is those are up eight to ten basis points.

So the expectation for somewhat higher inflation is starting to show up in the numbers. And you know, that's where we are today. Again, we don't know. I think there's a huge wide range of outcomes over the next year or so.

But IT does the fed in an interesting position because if you say the dollar is up, which tends to hold down inflation, import Prices and we see oil Prices down sharply, agricultural Prices down sharply because we're all traded in U. S. dollars.

So that's a hit to those markets to end. If we have terrible to on agricultural goods, that certainly would be another hit there. So you have some offsets on the inflation outlook, but the focus, I think, is more on the stimulus and the increase in deficits that we would probably get down the road if all these proposed policies are implemented.

That a huge if nobody really knows what will actually come out of congress after the campaign. A lot of things are set on the campaign that don't get ample mended, so will have to wait and see about that. But I think you're saying this magic reaction.

And if I met the fed right now, chances are then the go ahead of the twenty five basis point right caught on thursday because that's really been part of the game plan so far. It's what has been signalled. There has been no kind of leaks to the press about them changing their minds or anything.

So there's no counter signal right now. And uh, inflation has come down in this team and there is a big gap between the fed funds rate and the inflation rate gives them room to ease policy. That being said, on a ford looking basis, when we hear chair pol speak at the press conference, forward guidance may be a lot more cautious than IT has been.

And that's because just like us, the fed is looking at all these cross country to think we're not. You know, it's hard for us to forecast where we're going. And I think a pause at the december meeting might be in the cards.

Hard to say because we get more data between now and then. If we had really, really soft employment data, then I think the fed could go ahead in december and cut. I think they'd like to get around four percent, which is reasonable feed pounds rate, if you have a two and half percent inflation rate. But december, they could take a step back to say, let's take another look at things. Let's may be hold off a little bit and be more cautious and maybe in every other meeting kind of cut and ending at a much higher level than we might have thought just a few days ago.

You know, it's interesting when you said how much we don't know if I thought about that too. In the context of the equity market. I think there are all these new york assumptions that are there are made.

Maybe this is human nature when you get the result of election and then you start to think about, okay, what's this good for? What's this bad for? Who benefits, who gets hurt? And I this is my P. S. A. For our podcast episode today.

And you you probably know where i'm going with this because I often use that as an example of the perils of extrapolating the the kind of narratives that you hear in the aftermath of election, especially around sector behavior and and prior to the results of this election, I went back and looked at a lot of wall street related headlines, research providers in the immediate aftermath of the twenty sixteen win by trump, to see what the narratives were in. And probably the most dominant one that brought sectors into the mix was this is going to be great for the energy sector is. And as a reminder, the S M, P.

Energy sector is all traditional energy companies. There's no renewables in there, no solar companies, no alternative is is, is, is actually a pretty concentrated sector in that exam. Mobile and chevron represent almost fifty percent of the sectors.

So we think about sectors like communication services. They were discussing in tapping top heavy man energies, pretty top heavy too. But the remainder of the stocks are traditionally mp companies and and drilling companies. Well, the warning about extrapolation is if you look over the full first trump term from inauguration day twenty seventeen to inauguration day of twenty twenty one, you saw that the energy sector was the not just the single worst performing sector. IT was the only one down, and IT was down sixty percentage points more than the next worst sector.

Fast forward to the by inherit administration, from the inauguration day in twenty twenty one to basically yesterday's clothes, the energy sector, again, all traditional energy companies, has been the best performing sector, even outperforming technology. And the real point there is not wink, wink, not not IT turned out trump is actually anti traditional energy. And by in Harris for pro traditional energy, the point is that there are so many forces in impact.

What markets do, what sectors do, what b industries do, what types of stocks do? Be really careful about letting election related narratives define how you approach investing and markets. IT just doesn't tend to work maybe beyond the very, very, very short term.

Yeah, I think let's also turn the bond market, although one thing we can say is we're probably going to get more cautious about duration rather than less. We ve moved from movies, go head extendable as rates moved up to more benchmark, staying kind of with your your benchmark. I would say we're even though rater up, we're gonna wait and see what happens before suggesting any more duration extension from here.

And we make for some people might make sense, even short, need a bit again though, not to make drastic moves the day after election. That's not a smart idea because again, there's such a wide range of outcomes. And and i'll remind people just stuck about the fed, that pulse term is up in early twenty twenty six.

So I don't think there's a lot of other turn over coming and as a couple of members will turn over in the next, you know, year two, but IT will be a lot of change. So that being the case will only have probably the prospect of a new chair ahead of us in the near term in a year, well over a year. So that gives plenty of time to kind of assess where the fed is and and what the composition will be.

But IT adds to that level of uncertainty in terms of, you know, where we go from here because we're just getting used to pulse communication style. We have well up to potentially get used to some new communication styles, and that takes a while to interpret. So yeah, I would just like go big careful to make big changes right now, start to give some time to think this through. But we are getting more cautious, in our view, simply because the wind seems to be shifting towards more expensive policies for the economy at a time when the economies already growing at a pretty healthy rate.

You know you get the invention getting down to brass tax to the extent we there's an a sharpness to those tax at this stage post election. but. Let me do the same thing on the equity market side of things as you know.

And and i'm assuming maybe many of our listeners, no, we have had a view that factor based investing makes a bit more sense than trying to make model thic sector calls. We've been recommending a stay up in quality in terms of those factors. And for those who don't know what factors are, it's just a kind of fancy word for characteristics. And there has been much more consistency in terms of leadership at that characteristic level in a stronger baLance sheet, Better profitability trends, Better free cash for high interest coverage in general, I don't think that changes.

But I also think that the rotations that started in the market back to midsummer of this year where you started to see a bit of a pullback in some of the high fires and mega cap tech, tech related names, the magnificent seven, and you started to see rotation, at least initially, into the interest sensitive areas of the market, especially when the fed started telegraphing easier monetary policy and you've had rotations in other areas when china now out some of its stimulus measures, you've got a little bit of a lift in some of those globally sensitive areas like materials and industrials. We've had bouts of leadership shifts toward the more traditional defensive areas like staples and health care when there's a bit been a bit more uncertainty. And that was going to be a theme for us as we look ahead to twenty, twenty five.

And that's not changing. I just think that those rotations have the potential to more significant, more severe at times and is given what we know now, I think it's more of a reinforcement again of at least having that factor based overly versus trying to make these shorter term sector based calls. Whether it's tied to the uncertainty with regard to policy broadly or as we learned back in two thousand and eighteen, all the uncertainty that came about with our got to trade policy and who were the areas, the companies, the industries that were on the receiving end of giving end and how you work that into analysis. So I think maybe more volatility around those sector rotations at this point, I think is an easy call for twenty twenty five knowing what we know now.

Yeah, totally agree. Volatility is gonna with us, I think, for a while in all the markets until we've figure things out. And I will just mention the dollar as you did IT surged, uh, today, it's going to be tough st if there's a major trade policy changes, toughness and emerging market countries because often they issue that U S.

dollars. So they are stuck trying to pay VISA but stronger dollar take back that interest and and principle, but is also a lot of the trade affects those countries as well. They're big usually trading countries, big exporters. So you can see this morning, we're seeing a lot of pressure on the mexican peso. And and as you go through the emerging markets, it's really rippling through there.

So that just something to pay attention to because even though we're cautious and want to wait and see what the policies actually are, that the markets gonna Price in these things, the markets gone to try to Price in maybe three or four times what we actually get a policy change. But that kind of volatility is likely to be what we see across both and bond here for a while. With that, we could note that next week are college, my towns and whose are expert on all things washington and policy.

We'll have a full post election episode on his washington rise podcast, and we plan to rebroadcast that episode in our feet. So stay tuned for that one. And I know we're all looking forward to hearing his analysis and how he sort through all this information.

But the m besides the obvious, any economic indicators you're watching ahead for the middle november?

yeah. So next week, we will get an update on the N F I B data and that stands for the national federation of independent business. So IT takes the polls of how small businesses are feeling and maybe too soon to truly capture the reaction to the election.

But on a going forward basis, at least over the next couple of months, that's what i'll be keeping a little bit closer. And I am because, you know, in this cycle of significant by vacations and cross currents, we know large companies have generally been doing well, but there has been a little bit more pain being felt down the size spectrum. And I I think maybe as we get more election related survey data like the antique b, that'll be interesting.

And then of course, the big ones next week or the consumer Price index and the producer Price index, to your point about additional data is going to to color the feds thinking, not just the the election and then um retail sales to which are obviously is a oppose on the health of the consumer. So those are what's on my radar. Assume those are on your rather as well.

Yeah, absolutely the inflation numbers. And we did get a big move in the bond market of those retail sales numbers last time around. So definitely keeping on those.

Those often come with revisions and they are a nominal terms. So anything goes when when you get retail sales and of course, the inflation numbers. But first, we have to deal with the F O M C meeting. That's gonna take up a lot of my time. And then i'm hoping we can creese into the thanksgiving day holiday without too much turmoil and looking forward to a few days of them.

Again, thanks for listening. You can always keep up with us in real time on social media. And i'm at Cathy chant as Cathy with A K an accent.

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