The Big Picture
The stock market doesn't like uncertainty. That is a silly expression, because there is always uncertainty, which would mean the stock market is never in a likable mood. Judging by the past two years alone, that could not be further from the truth.
In the past two years the S&P 500 has increased 57%, excluding dividends, which is another way of saying it has found a lot to like amid a lot of uncertainty.
One thing that had the nation -- if not the stock market -- riddled with uncertainty was the outcome of the 2024 presidential election. It was deemed by many polls as too close to call, and some pundits averred that it could be a contested election that might take weeks to settle.
That uncertainty was cleared out this week, however, when the election results showed a decisive victory for Donald Trump and a likely GOP sweep of the House and Senate.
What followed was a rally of epic political proportions.
Feeling Energized
The day after the election, the Dow Jones Industrial Average gained more than 1,500 points, the Russell 2000 soared 5.8%, the Nasdaq Composite surged 3.0%, and the S&P 500, with a 2.5% gain, logged its best post-election performance ever!
There were record highs for the Dow Jones Industrial Average, Nasdaq Composite, S&P 500, and S&P Midcap 400.
One could cite any number of outsized moves in nearly ever corner of the stock market. Tesla (TSLA), for instance, gained 14.8%, and Dow component Goldman Sachs (GS) advanced 13.1%.
Why was there so much energy behind the gains?
- There was relief that the election wouldn't be contested.
- There was excitement that a GOP sweep would pave the way for lower corporate tax rates and less regulation.
- There was confidence that the economy will continue to grow above potential, which bodes well for the corporate profit outlook.
- There was short-covering activity.
- There was a fear of missing out on further gains that squeezed cash in from the sidelines.
We probably didn't capture every reason, but the point is that stock market participants had visions of good things dancing in their head.
There was a "pull-forward" element in the rally. After all, Inauguration Day doesn't happen until January 20, 2025. That is the first day president-elect Trump's administration can get to work delivering on campaign promises. Members of Congress will be sworn in on January 3, so they will have a head start on the people's business.
An Easier Path
It is often said that governing is harder than campaigning. That is especially true for a president when there is a split Congress. That is unlikely to be the case this time.
Several House races still need to be decided, but polling indications suggest the final results will settle out in the majority favor of Republicans. Accordingly, president-elect Trump should have an easier time governing with his party controlling both houses of Congress, assuming deficit hawks in his own party don't stand in his way.
An easier path toward governing, though, could make it harder for long-term rates to come down if president-elect Trump's policies fuel increased deficit spending that drives up the national debt, as some economists suggest will be the case.
Borrowing another silly expression: time will tell.
All eyes will be on the Treasury market as a gauge of investors' view of the fiscal situation. We'll be silly enough to say the market could go up or down. Lately, the Treasury market has been going down more than up since the Fed cut rates on September 18, so prices have fallen and yields have risen.
The latter point notwithstanding, it would be remiss not to mention that the 10-yr note yield, which kissed 4.48% the day after the election, was down seven basis points for the election week to 4.30% as of this writing.
There is a narrative that the Trump administration, with Elon Musk's help, will work diligently to cut government spending and that lower tax rates and deregulation will promote stronger growth that leads to increased tax receipts that keep the deficit in check. Again, time will tell, yet the bond vigilantes and deficit hawks aren't throwing down the gauntlet yet.
What It All Means
No matter one's political affiliation, the best thing for the country is that this wasn't a contested election. There will be a new administration taking over January 20 that will pursue plans that it thinks are best for the country.
Clearly, not everyone will agree with those plans, but for our purposes here, what matters is how the capital markets respond to those plans.
The early response by the stock market is undeniable. It is excited by pro-growth policies rooted in lower tax rates and less regulation, and it isn't trading in fear of tariff reprisals. The early response by the Treasury market is arguable. It might be more about adjusting for a better growth outlook than it is about deficit and inflation concerns.
Time will tell what the implications of the 2024 election will be. The stock market at least likes what it thinks will happen in the uncertain future.
