November 2024: Markets rally post-election, but focus remains on growth, inflation, and interest rates

November 2024: The month at a glance

Stocks rose after the election on November 5, as investors welcomed both putting the election behind them and expectations of potentially higher economic growth. 

After the initial rally, investors turned their focus back to the usual suspects: the pace of economic activity, progress on inflation, and the speed and magnitude of the Fed's rate-cutting path. 

On that front, the US economy continued to show solid growth across a number of indicators, inflation came in slightly above expectation, and the Fed cut policy rates for a second time but again suggested the path of further cuts would be data-dependent. Bond returns got a boost as longer-term rates fell over the second half of November after rising steadily since the Fed’s 50 basis point rate cut in September.  

• Third-quarter earnings for the S&P solidly beat expectations, rising 8.9% from a year earlier.¹
• Consumers continue to fuel the economy with retail sales up more than expected in October.²
• Existing home sales rose in October, posting the first annual gain in over three years.³
• Inflation rose slightly more than forecasted in the latest month.⁴
• The Fed cut rates by 25bp in November, but expectations for a December cut have decreased.⁵
• The yield on the 10-year Treasuries ended the month at 4.18%, down 10bp from October.⁶

Strong economy + stubborn prices
= slower rate cuts

After the Fed cut policy rates by 25bp on November 7th, Chair Powell suggested that “the economy is not sending any signals that we need to be in a hurry to lower rates.”⁷  Add sluggish progress on inflation, and investors can assume that while the path of lowering interest rates has not changed, the speed of those moves may have decelerated. Indeed, markets are much less confident of another rate cut at the Fed’s December meeting, with futures markets now suggesting a 38% chance of no cut vs just 17% at the start of November.⁸

Further complicating the picture is the impact of the economic policies that will be put in place by the new administration and Congress. Many proposals on tariffs, immigration, regulation, taxes, and spending have been floated both during the campaign and since the election, but it is important to note that the details of actual legislation or executive orders remain uncertain. When asked about how to incorporate the potential policy changes into interest rate decisions, Fed Chair Powell said, “we don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy would be — specifically, whether and to what extent those policies would matter for the achievement of our goal variables: maximum employment and price stability. We don’t guess, we don’t speculate, and we don’t assume”.⁹ Still, while the Fed might not speculate, the current posture for many investors seems to be that, as J.P. Morgan described, the “prospects of pro-growth policies and deregulation overshadow the risks of tariffs and rising deficits.” ¹⁰

Regardless of the impact on the pace of monetary policy easing, the early market moves show a broadening out of leadership, especially to economically sensitive sectors (cyclicals and small cap, for example), weakness in international markets relative to the U.S., a stronger dollar, gains in crypto currencies and some upward pressure on longer-term interest rates to name a few. These initial moves may prove temporary or overdone, so it is wise for investors to remain focused on the underlying fundamentals, especially corporate earnings and inflation, as these dimensions ultimately influence markets far more than any government policies.

Stocks jump on increased U.S. growth expectations 

After stumbling in the final weeks of October, U.S. equity markets rallied after the election and ended the month at record levels for many indices. The gains were supported by generally strong corporate earnings as well as increased growth expectations from assumed future changes in regulatory and tax policies. International markets slumped over the month on more challenging economic conditions and potential increases in tariffs. Returns were strong in most sectors outside of healthcare, with the top and bottom segments especially influenced by political developments.

• All major U.S. indices posted returns greater than 5%, with the S&P 500 posting its best month of the year.¹¹
• Small-cap stocks led the way with returns above 10% across all styles.¹²
• International developed and emerging markets substantially trailed US stocks for the month.¹³
• China’s equity market fell 4.43% in November on the heels of a 5.91% drop last month.¹⁴
• US sector performance:¹⁵
  • Consumer discretionary stocks topped returns on a +38% post-election surge for Tesla.
  • Financials posted a 10.28% return and are now the leading sector for the year.
  • Healthcare stocks fared worst on concerns of regulatory changes for drug makers.¹⁶

Pull back in interest rates bolster bonds

After an initial jump immediately after the election, longer-term rates fell in the last half of the month. The 10-year Treasury yield declined 26bp between November 13 and the end of the month, partly reversing the 81bp rise in long rates that began when the Fed lowered the short-term policy target rate by 50 basis points in September.²¹ The Fed continues to bring down the short-end of the yield curve and the yield curve is slowly flattening.

• Fixed income returns rose across all segments.²²
• Credit risk was rewarded as corporate and emerging market bonds fared well.²³
• International bonds declined most for the month and have been especially weak for the year.²⁴

Growth expectations have increased…

Underlying the strong U.S. equity market gains over the past two years has been a solid recovery in company earnings since the relative low point reached in Q4 2022. For some segments of the market, stock prices have outpaced even the robust fundamentals delivered since then, pushing valuations up to record highs. Implicit in those persistently high valuations are expectations for continued strong earnings growth. Much of the high expectations are tied to optimism about the potential of artificial intelligence to fuel corporate earnings growth, but they have also come from increasing confidence in the resilience of the economy more generally.

One way to see the improving confidence is in the sentiment of consumers. As the chart below shows, the path of that sentiment over the past several years has not been smooth, as forecasts of economic activity have swung between recession and a soft landing in the face of surging inflation and the Fed’s corresponding interest rate hikes. The University of Michigan index of consumer sentiment shows the low point was hit in June of 2022, the same month inflation hit its recent high point of 9%. Sentiment has improved noticeably since then, reaching a recent high this past March before falling sharply between April and July only to recover again in the past four months.²⁵ The last reading of the index came after the election and showed a further gain in sentiment.

Other measures of consumer sentiment show similar recent patterns. The Conference Board’s Consumer Confidence Index for November taken post-election was at the top end of its range in the past two years.²⁶ In addition, the proportion of consumers anticipating a recession over the next 12 months reached the lowest level since the question was first asked in July 2022, four months after the Fed began hiking interest rates. Optimism about the stock market has also increased, with 56.4% of consumers now expecting stock prices to increase over the year ahead, a record high for this measure.²⁷

…along with inflation concerns

As the sentiment chart shows, the feelings of consumers can be volatile, reflecting the inherent uncertainty in underlying economic conditions. One dimension where uncertainty persists is in the progress in bringing inflation down to the Fed’s stated 2% target. Recent inflation figures have shown a stalling in that progress even if the larger picture shows an impressive retreat from the high inflation of 2022. ³⁰

Several market commentators have looked to past battles with high inflation and suggested that a “second wave” of inflation can often follow the initial progress on lowering inflation.³¹

The chart below overlays the experience in battling inflation of the 1970s with the current period. When viewed this way, the implications of the 1970s pattern are ominous. Initial success in lowering inflation (in the 1970s, inflation fell from 12.2% in 1974 to 5% in 1976) was followed relatively quickly by a resurgence of inflation (peaking at 14.2% in early 1980) before then-Fed Chair Paul Volker’s rate-raising campaign and two recessions ultimately brought inflation under control.³²

‍

As attention grabbing as this chart is, there are some clear differences between the 1970s and now. 

First, the level of inflation is several percentage points lower now than it was in the 1970s. More importantly, Fed officials learned some valuable lessons about the effectiveness of monetary policy tools in balancing their dual mandate of low inflation with low unemployment. In the 1960s and 70s, economists and Fed policymakers believed that they could lower unemployment through higher inflation, a tradeoff known as the Phillips Curve. During this period, the Fed used a so-called “stop-go” monetary policy, which shifted from fighting high unemployment with lower interest rates and higher money supply to addressing high inflation by raising interest rates. Unfortunately, the Phillips Curve tradeoff proved unreliable and inflation and unemployment increased together in the mid-1970s.³⁴ Current Fed policymakers and economists, in general, know this history well. That is not to say mistakes can’t be made again, but one can also note the restraint the Fed is currently showing in lowering interest rates before they feel the inflation genie is back in the bottle.

There is no doubt that consumers' expectations for the economy and markets have improved in the past several months, with continued increases in that positive sentiment after the election. The gains in equity markets in November reflect that optimism. Much of this improvement stems from steady, albeit slow, reductions in inflation, a solid labor market, and strong corporate earnings. 

It is also clear that, as always, risks are present. 

The major risk appears to be a rekindling of inflation. Rising commodity and energy prices from global disruptions, higher wage costs from tightening labor markets, and the Fed loosening monetary policy too fast at the same time government spending remains expansionary could all combine to create a “second wave” of inflation. Equity markets appear to have priced in a very low probability of a resurgence of inflation, making it even more important to keep a close eye on any pressures that build, as well as the Fed’s policy responses.

^{[1] https://www.spglobal.com/spdji/en/documents/additional-material/sp-500-eps-est.xlsx}

^{[2] https://www.census.gov/retail/sales.html}

^{[3] https://www.nar.realtor/newsroom/existing-home-sales-grew-3-4-in-october-first-year-over-year-gain-since-july-2021}

^{[4] https://www.bea.gov/news/2024/personal-income-and-outlays-october-2024}

^{[5] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html}

^{[6] https://fred.stlouisfed.org/series/DGS10}

^{[7] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241107.pdf}

^{[8] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html}

^{[9] https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241107.pdf}

^{[10] https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/the-2024-presidential-election-what-do-we-know-and-what-does-this-mean-for-my-investments/}

^{[11] https://www.spglobal.com/spdji/en/index-family/equity/}

^{[12] https://www.spglobal.com/spdji/en/index-family/equity/}

^{[13] https://www.msci.com/end-of-day-data-search}

^{[14] https://www.reuters.com/markets/asia/china-stocks-set-best-month-nearly-decade-stimulus-cheer-2024-09-30/}

^{[15] https://www.spglobal.com/spdji/en/index-family/equity/us-equity/sp-sectors/#indices}

^{[16] https://www.morningstar.com/stocks/healthcare-stocks-got-crushed-after-electionis-it-time-buy}

^{[17] https://www.spglobal.com/spdji/en/index-family/equity/}

^{[18] https://www.msci.com/end-of-day-data-search}

^{[19] https://www.nasdaq.com/market-activity/index/comp/historical}

^{[20] https://www.spglobal.com/spdji/en/index-family/equity/}

^{[21] https://www.federalreserve.gov/releases/h15/}

^{[22] https://www.spglobal.com/spdji/en/index-family/fixed-income/}

^{[23] https://www.spglobal.com/spdji/en/index-family/fixed-income/}

^{[24] https://www.spglobal.com/spdji/en/index-family/fixed-income/}

^{[25] https://fred.stlouisfed.org/series/UMCSENT}

^{[26] https://www.conference-board.org/topics/consumer-confidence}

^{[27] https://www.conference-board.org/topics/consumer-confidence}

^{[28] http://www.sca.isr.umich.edu/}

^{[29] https://fred.stlouisfed.org/series/UMCSENT}

^{[30] https://fred.stlouisfed.org/series/CPIAUCSL#0}

^{[31] https://www.apolloacademy.com/is-inflation-coming-back/}

^{[32] https://fred.stlouisfed.org/series/CPIAUCSL#0}

^{[33] https://fred.stlouisfed.org/series/CPIAUCSL#0}

^{[34] https://www.federalreservehistory.org/essays/recession-of-1981-82}

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