November Market Update 2024

Posted by Bedrock on 29th November 2024

November Market Update 30.09.2024

 
“Revolution is not a dinner party.”

— Mao Zedong

Summary

• Donald Trump’s emphatic election victory was the key event in a month busy with other macroeconomic and political developments (from another Fed rate cut, to German government collapse and major geopolitical developments).
• Trump’s Republicans secured a trifecta of the presidency and both houses of Congress. Markets were buoyed by a clear-cut result that presages tax cuts: US equities (especially small caps) rallied, the dollar strengthened, while long-end rates rose on concerns about Trump’s fiscal plans and trade policy proposals.
• With fewer institutional impediments and a tighter grip on the Republican Party, Trump’s second MAGA administration looks set to be different – and more radical – than the first.
• Trump plans new import tariffs, tax cuts and deregulation. Running the economy even hotter while hitting the supply-side with tariffs and immigration curbs may push inflation higher. The pace of rate cuts is likely to slow, while rising term premia also pull long-end rates higher.
• Trump’s approach to foreign relations raises tail risks. Meanwhile, global economic cyclical divergence is likely to accelerate, with Europe especially struggling amid political paralysis in France and Germany.
• Near-term, the outlook remains for dollar strength and US equity outperformance, with small-caps in particular still having room for catch-up. Geopolitical uncertainty should keep gold bid, while this and macroeconomic divergence underscores the appeal of allocation to global macro hedge funds. An anticipate rise in mergers and acquisitions boosts the case for merger arbitrage and related strategies.

The Once and Future King

A week is famously a long time in politics. In markets, some months can feel very long indeed. A lot happened in November: Fed and Bank of England rate cuts, more corporate earnings, (disappointing) China stimulus, a UK budget, German government collapse, escalation in Ukraine, war and ceasefire in the Middle East, G20, COP 29. But the news most on markets’ minds is obvious: in January 2025, Donald Trump will return to the White House.

Crucially, his victory this month was emphatic. Trump expanded his vote share across the nation, narrowly won the popular vote and seized all seven ‘swing’ states. Down-ticket, he spearheaded Republican conquests of both the Senate and the House of Representatives. For better or worse, Trump can viably claim that what follows is the will of the American people.

Even more importantly, his Republican Party controls all three branches of government: the White House, Congress and the Supreme Court. Moreover, Trump’s grip on the Republican Party itself is far deeper than in 2016. The Grand Old Party looks fully MAGA-fied. Unlike 2016, Trump brings a committed cadre of lieutenants with defined plans and few impediments, presaging a more radical administration. We thus expect Trump to do what he has pledged to do – rather than dismissing it as mere campaign bluster. MAGA is fired-up and well-placed to reshape the world’s largest economy in the next four years.

The Trump Trades Ride Again

The unexpectedly clear-cut result drove the market response in November. Having wobbled in the days before the vote, the so-called ‘Trump trades’ rocketed back into force. These included a powerful bid up for stocks, especially small caps (on the view that Trump’s corporate tax cuts would benefit equities of all sizes). The S&P 500 had its best week of 2024 and breached 6,000 points; the small-cap Russell 2000 is up +10.6% MTD, hitting a new all-time high. Bitcoin, too, hit a new record high over $98,000 (Trump promises to be a pro-crypto president). Long-end Treasury yields backed up on deficit fears.  The dollar gained.

The sum is that markets have initially traded Trump’s second coming much as they did his election in 2016. But much as the US political landscape is very different from 2016, Trump will also step into a very different macroeconomic and geopolitical environment. The US economy is humming but debt towers higher and inflation risks persist; term premia are already rising. Russia has brought the largest war to Europe since 1945 (and moved significantly closer to China and North Korea), while Israel is fighting a two-front war. The US is intimately – but indirectly – involved in both. As the initial market response to the election settles, investors must therefore turn to the medium-term market implications of Trump: The Sequel.

“The US economy is humming but debt towers higher and inflation risks persist; term premia are already rising.”

Known Unknowns and Loyal Disruptors

Much remains uncertain and Trump’s approach to governance is likely to remain erratic. The initial risk-on burst faded as November progressed and markets moved to mull this political uncertainty.

But Trump’s swift start on the 4,000+ presidential appointments has already given some pointers – and markets have been responsive to key nominations. Personal loyalty to Trump and MAGA looks to be the deciding criterion; concern for the niceties of DC politics – or a lengthy CV – often not so much. Trump may not get his way with his most unorthodox picks: Attorney General-nominee Matt Gaetz has already been forced out. Pete Hegseth’s path to the Pentagon may be blocked if Senators judge his years as a Fox News host insufficient qualification to steer a $1 trillion budget and 3 million personnel as Defence Secretary. Vaccination science-denier Robert Kennedy’s Trumpian mandate to ‘go wild’ as Health Secretary points to a bumpy ride for health policy and related stocks – though Kennedy’s ability to wrestle the powerful pharma lobby remains to be seen.

Other selections look less provocative. Markets responded largely positively to the nomination of hedge-funder Scott Bessent to the crucial Treasury Secretary role. While a firm supporter of Trump’s economic concept, his pronouncements suggest a more restrained approach to tariffs, the dollar and the deficit. On foreign policy, while Trump has nominated the Putin- and Assad-friendly Tulsi Gabbard as Director of National Intelligence, Marco Rubio as Secretary of State and Mike Waltz as National Security Advisor are closer to the Republican mainstream. Both have hawkish views on Russia and – especially – China, and recognise the value of America’s alliances.

Even as investors parse these picks for policy pointers, only time will tell which individuals will wield real influence – and how long any will retain Trump’s famously fickle favour. The world’s richest man is a major joker-in-the-pack. Trump and Elon Musk have been on a wild bromance, with the latter named to a potentially impactful pseudo-government role atop a ‘Department of Government Efficiency’. But speculation has already begun as to how long Trump will tolerate the publicity-hungry Musk flying too close to the orange sun.

“Speculation has already begun as to how long Trump will tolerate the publicity-hungry Musk flying too close to the orange sun.”

Move Fast, Break Things  

What some tout as ‘MAGAnomics’ aims to restructure the US economy and how it interacts with global markets. Trump plans a tariff wall around the US (with a 10-20% tariff on all imports) to shelter a domestic manufacturing renaissance. Some in MAGA talk of tariffs entirely replacing income tax. Those sums do not add up but, either way, Trump also plans to permanently cut taxes for companies and the wealthy – with some tax breaks also for workers. With Elon Musk seeking government ‘efficiencies’, the administration plans to slash spending and regulations. Trump will promote domestic fossil fuel extraction to achieve ‘energy dominance’ and cut energy costs. He promises both inflation and interest rates will be low.

The exact shape remains to be seen – based on how far Trump wants and is able to push his ideas. The pacing and order of the action will also shape the economic impact. We expect a busy first 100 days, with many Executive Orders reportedly ready to go on day-one. Tariffs can come quicker than Congress-dependent tax breaks; deregulation will be more case-by-case.

And there are likely contradictions within Trump’s economic plans – including between his preferred means and intended consequences. Trump reaped voter anger at inflation but his plans to run the economy even hotter while hitting the supply-side with tariffs and labour-force shrinking anti-immigration moves may well be inflationary. Recent prints already suggest that disinflationary progress is slowing. Markets have consequently pared back expectations for rate cuts next year. Even as stickier inflation would anchor front-end rates higher, fiscal profligacy and a ballooning deficit should steepen the curve as markets price greater long-term fiscal sustainability risks.

“Trump reaped voter anger at inflation but his plans to run the economy even hotter while hitting the supply-side with tariffs and labour-force shrinking anti-immigration moves may well be inflationary.”

That said, one of the many uses Trump sees in tariffs is a tool of geopolitical leverage on a host of non-trade issues. We expect the new tariffs to soon be riddled with side deals, exceptions and special favours. Meanwhile, uncertainty on the numbers involved in anti-immigration action – theoretically up to 11 million deportations – further complicates the model, with immigration having been a key driver of GDP growth.

Friends Fear, Foes Cheer?

Trump’s approach to foreign relations is poised to reshape the global system – perhaps dramatically. He has a revisionist stance on the liberal order that the US built following World War II, and a transactional approach to international relations. Where America’s security-guaranteeing alliances were solidly understood as major US force-multipliers – not only in Washington but certainly in Moscow and Beijing – Trump loudly doubts their value. And where his predecessors have, if anything, been all too ready to deploy US military might, Trump has promised voters ‘I’m not going to start wars, I’m going to stop wars’.

Trump’s analysis that US allies could – and should – do more to ensure their own security might be right but his approach to leveraging it out of them by raising doubts about US commitment to decades-old security guarantees bears real risks. For us as investors, Trump’s approach therefore enhances the probability of more extreme tail-risk events – whether more Russian adventurism, or even conflict in East Asia, instigated by Beijing or Pyongyang. The new Commander-in-Chief’s aversion to wielding military force – except, troublingly, domestically – may undermine the US deterrent that kept the Cold War on ice and enforced the post-Cold War Pax Americana. The trend of increased defence spending in Europe and Japan looks set to accelerate, likely laying further runway for the defence stocks that have already rallied, especially since Trump’s win.

“The trend of increased defence spending in Europe and Japan looks set to accelerate, likely laying further runway for the defence stocks that have already rallied.”

Europe’s Struggles

Europe in particular is bracing itself. The challenge is threefold: the trade-war threat to already weak economies; high-risk moves on Ukraine; and the longer-term impact on European security as Trump repositions resources towards the Indo-Pacific. Political paralysis in the EU’s two largest powers does not bode well.

The ideological incoherence of Germany’s three-way coalition finally brought down the government this month. Early elections are scheduled for February. The centre-right CDU is firmly expected to win – but parliamentary arithmetic is again likely to be difficult and another painful three-party coalition cannot be ruled out. The government had been hamstrung by the constitutional debt brake and the pro-austerity FDP’s blocking of further support to the struggling economy (including via much needed investment) and defence spending. But the debate on borrowing is shifting and even the CDU is signalling debt-brake reform. That, though, would be months away, leaving Europe’s largest economy muddling through.

France, meanwhile, continues to face the fallout of Macron’s ill-fated decision to call early elections – and an increasingly dire fiscal position. The country has not balanced a budget since 1974; Macron’s progress on the deficit was blown way off-course by pandemic spending. The deficit is now at 6.2% and debt-to-GDP 110%. Michel Barnier’s fragile minority government is struggling to agree a budget with the opposition that must be passed by 21^st December. Marine Le Pen’s far-right Rassemblement National is now threatening to bring down the government – causing French stocks to slide (CAC 40 -2.3% MTD) and borrowing costs to spike (the 10Y OAT yield is now higher than Greece’s 10Y yield).

Preparing for January

The uncertainty and volatility injected by a new Trump administration could create opportunities for active managers. While the medium and longer-term impact of Trump’s economic policy remains open, near-term US growth exceptionalism looks set to continue – supporting continued US equity outperformance (especially as Europe continues to struggle). US small-caps still have room to catch up with their bigger peers. Dollar strength should also be sustained by Trump’s policy mix. While gold has retreated somewhat this month, we see geopolitical uncertainty only increasing under Trump, keeping the yellow metal bid. For similar reasons, as well as widening global macroeconomic divergence, we retain conviction in global macro hedge funds. An anticipated rise in US mergers and acquisitions should also boost the appeal of merger arbitrage and related strategies.

If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch