Alert
Investor Insights: The Election, A Fed Rate Cut, and a Big Week in the Market
The first week post-US federal elections was eventful for the country and financial markets as investors digested election results and a second rate cut by the Federal Open Market Committee. Certainty and resolution were the backdrop to two events that typically bring major volatility and consternation among market participants.
For investors, these significant events and the relative calm associated with them is good news; there’s less market volatility. Leverage this positive trajectory with insights into how current events are impacting the current investment landscape and what to expect in 2025.
A Deeper Look into Market Reaction
The market rocketed higher the day after the election, with all major indices closing up by 2.5% or more at record highs. This broad sentiment largely reflected comfort in a clear resolution versus the possibility of a contentious and drawn-out legal battle. The market loves certainty and clarity and this election cycle it got what it wanted in that regard.
With a Republican sweep of the White House and both chambers of Congress, the broad assumption of lower regulations, business friendly policies and lower taxes added fuel to the market’s rally. Certain sectors responded better than others with investors positioning for what that mandate could mean for various industries over others:
- Consumer Discretionary, Energy, Financials, and Technology. Potential for lower regulations, increased mergers and acquisitions, laxer share buyback rules and lower taxes have all propelled these sectors post-election.
- Health Care, Biotech, Real Estate. Possible changes to health care and insurance requirements, risk of higher borrowing rates resulted in muter returns for these sectors.
- Currency Markets. The foreign exchange market also saw initial reactions with the dollar strengthening against foreign currencies on the heels of rising rates and a renewed focus on domestic manufacturing and stricter trade policies, foreign equity markets also retreated or saw muted returns from these currency headwinds.
Potential Market Trajectory
At this point, the market is reacting based on assumptive policies with no definitive timelines for their implementation nor any clarity on the shape they could take. We expect a continuation of the greater bullish market trend combined with increased positive business sentiment and a resolution to what could have been a much more complex election process.
These tailwinds are likely to continue through year-end given the existing momentum along with the broadening to areas of the market that haven’t participated as much. Any clarity on longer term effects of the new administration and congress on markets will take well into 2025 to fully understand and bake into the market.
The Easing Cycle Continues
With the election results posted, the market started looking toward the next Federal Open Market Committee meeting, the first since a rate cutting cycle kicked off in September 2024. As predicted the Fed cut rates by 0.25% bringing the federal funds rate to 4.50-4.75%. With inflation continuing to abate and move towards the 2% goal, Fed’s attention has clearly pivoted to preventing a slowdown in the economy and maintaining a healthy jobs market.
Looking forward, markets are anticipating the Fed to make one more 0.25% cut at the December meeting. The outlook for 2025 has grown a bit murkier given considerations for higher growth, the possibility of tariffs being implemented by the new administration, and an ever-growing national debt. Although the Fed is data dependent, the market had estimated anywhere from 0.75-1% in cuts for 2025 which could now be in jeopardy given the potential for increased or stickier inflation from these new economic proposals.
The ten-year treasury yield has been reflective of this, hovering near its recent highs driven by not only the potential for increased growth, but also the continued unwind of recessionary trades which in turn drive yields higher. As part of his commentary, Chair Jerome Powell acknowledged a few items that eased some of the market’s fears and resulted in rates retreating slightly on the heels of his comments.
Chair Powell acknowledged the need for fiscal policy to be much more in line with monetary policy, the independence of the Federal Reserve from the Executive Branch, and the ability of its governors to serve out their terms without intercession by others. These comments paired with the president-elect acknowledging he would be fine with the Chair serving out his current term, allayed some of the fears of an executive branch directly influencing monetary policy.
Like the election results, the market cheered on the Fed decision with minimal volatility holding its gains pre- and post-Fed conference driven by the certainty of the cut and commentary from the committee.
What This Means for investors
With the election results and Fed decision concluded, look forward to more clarity as 2024 ends and 2025 comes into view. As with past administrations and policy platforms, there’s no definitive way to know what sectors and industries will benefit. Election outcomes don’t typically drive market returns over the long run, so don’t let them derail your plans.
Making substantial changes to a portfolio based on the results of the election adds unnecessary risk to your long-term objectives. As substantive economic effects become clear with finite policy, it may be prudent to have conversations around tactical adjustments within your plan. Stay focused on long-term goals and be alert for emerging opportunities, especially given the falling rate environment. Apolitical market trends backed by sustainable economic forces and an accommodative Fed should be the driving factor in any portfolio adjustments.
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