Market Commentary

December 9, 2024

Major stock market indices rallied to record highs following the U.S. election, with the S&P 500 Index closing out November with its best calendar year-to-date return since 2013.  A Goldman Sachs-created basket of stocks that should benefit from Republican policies rocketed +14.8 percent in the five trading days after the election but has retraced about one-third of the gain through December 6.  Cyclical stocks extended their considerable year-to-date lead over defensives, and stocks with higher domestic versus international sales exposure outperformed for the month.  As for market capitalization size, a “risk-on” rotation and short squeeze helped fuel a catch-up rally in small-cap indices.  Even so, the Russell Mid-Cap Growth Index, generating a +13.3 percent return in November, outperformed its small and large counterparts.

Given slowing job growth and inconsistent Beige Book readings, we believe the Federal Reserve will cut the fed funds rate by 25 basis points in December.  Also, not wanting to be the scapegoat for a potential downturn, it will likely maintain an easing bias through the first half of 2025.  However, much depends on how much President-elect Trump, supported by a Republican majority in Congress, follows through on his campaign promises.  With limited slack in the economy, Trump must be careful not to inject too much stimulus while avoiding supply shocks through trade disruptions or deportations.  Absent a surge in productivity, his pledge to bring down prices and grow GDP is incompatible with heavy tariffs and mass deportations.  For this reason, we believe (hope) the Trump administration will limit itself to the threat of tariffs to extract concessions and focus its deportation efforts mainly on border crossers with criminal backgrounds.  There is considerable risk to the downside if they do otherwise.

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