What Happened Last Week
- Republican Election Sweep: Republicans granted a strong mandate to pursue an ambitious policy with Trump’s decisive victory, anticipated majorities in Congress, and a conservative Supreme Court.
- Election Market Reaction: The reaction to the sweep was positive, while equities and the dollar rallied significantly.
- Federal Reserve Cuts: The Fed cut by 25 bps, as expected; not a whole lot of hoopla from Powell’s presser.
What We’re Watching This Week
- Vote Counting: A Republican majority in the House is expected, but the size of that majority, which has important implications for fiscal policy, is still unknown.
- Trump’s Cabinet: Markets will digest appointments to Trump’s Cabinet as investors closely watch Treasury and Commerce picks.
- Economic Data: October inflation and retail sales in the U.S. will update investors on price pressures and the consumer.
Investment Management Team’s Views
- A decisive electoral victory for Trump and the Republicans drove stocks sharply higher last week. The market’s reaction to this election was analogous to the 2016 reaction (see our election piece for more), with the rise of the dollar, Treasury yields, and U.S. stocks, led by screaming small-caps. Zooming out, both large-caps and small-caps registered their best weeks of the year as Bitcoin hit a fresh all-time high. Despite the similarities, we caution against overfitting the 2016 analog; for instance, U.S. stocks, specifically U.S. growth, rallied much more sharply last week than in the first week of Trump’s election in 2016.
- The FOMC delivered the expected 25 bps cut with no changes to their guidance. In the press conference, Powell responded with a firm “no” when asked if he would step down if the President-elect were to follow through on some earlier statements made to that effect during his campaign. Also, during the press conference, Powell opened the door to a pause in rate cuts should the data demand it; we sense that the Fed will lower rates again in December and wait to see how the data evolves in the first few months of next year. Internationally, cuts from the Bank of England and two other European central banks kept the momentum toward smoother global monetary policy, a helpful backdrop for global growth.
- This week, we expect key economic appointments for the new administration to trickle in. Markets are particularly focused on Trump’s picks for the heads of Treasury and Commerce. We are still waiting for the final House result; although markets expect the House to flip Republican, the size of that majority is still unknown. On the data front, updates on inflation and retail sales are due; we believe the market will continue to emphasize growth data over inflation as the balance of risks in the U.S. economy shifts away from inflation and towards employment.
The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.
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