This week with Sadiq

America has voted. What next?

November 04, 2024

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Market recap

  • Equity markets gave back some gains this week alongside a full helping of economic data, earnings results and ahead of the U.S. election.

  • The S&P 500 slipped 1.4%, with Technology giving back more than 3%.

  • While the October payrolls report was clouded by hurricane-distorted data, the big picture is that the economy continues to grow at a solid clip (2.8% in Q3) and inflation continues to mellow.

U.S. election

Early Wednesday morning, as votes were tallied and the electoral college picture became clearer, news organizations declared that former President Donald Trump would be returning to the White House. The U.S. Senate will also fall under Republican control, while control of the House of Representatives has yet to be decided as of Wednesday morning but appears to be leaning Republican as well. Though the election proved to be as close as polls had indicated, the Presidential race largely played out as we were expecting, with momentum seemingly having shifted to Trump over the past several weeks. If there was a surprise on election night, it was the potential for a ‘Red Wave,’ with Republicans on pace to control the White House and both houses of Congress. So far, markets’ response has been positive, with Financials, cryptocurrency, and even the U.S. dollar (USD)—the value of which is likely to come down under the Trump administration’s tariff-heavy trade policies—all strengthening in early trading. Conversely, the price of oil is down due to Trump’s stated goal of increasing supply, while gold is down because of the USD’s strength and the perception that there is less need for it as a hedge against uncertainty. There has also been some negativity in the bond market, with the yield on the 10-year Treasury surging to 4.4% from 4.28% a day earlier.1

It is important to note that Trump’s economic plan—including tax cuts for corporations—is likely to be implemented rapidly since he is constitutionally limited to a four-year term, having already served one four-year term. Looking ahead, we expect this to help build momentum in areas of the market that had been lagging behind, including small caps, and to further fuel the cyclical rotation that I’ve discussed previously. Our portfolios are well-positioned for that kind of market environment: heading into the election, we were already overweight equities, overweight the U.S., and were already participating in the cyclical trade.

Though the U.S. economy remains strong and the market’s early response to the election result has been positive, investors should be careful not to get complacent. Trump’s approach to international relations is likely to differ significantly from President Joe Biden’s. Chinese markets may struggle under Trump’s trade policies, and there is also a chance that geopolitical risks could rise under a Trump administration, especially with regard to the Russia-Ukraine war and conflict in the Middle East. Investors should monitor these situations closely, and they are among the reasons why we still want to hold some defensive hedges in our portfolios, including gold.

Bottom Line: Donald Trump’s victory appears to be setting up markets for a Q4 rally, though investors should be aware of the potential for heightened geopolitical risk in the coming months and years.

Earnings

Q3 earnings announcements are continuing to roll out, and results have generally been good, though a few forecasts haven’t been as encouraging. This is particularly true of Technology, where the bar is very high and good earnings aren’t enough to provide a lift to stock prices—last week, both Meta and Microsoft were down even though their numbers were strong. It is becoming clear that the magnitude of Tech earnings growth is not likely to meet investors’ high expectations, and higher volatility is possible as a result. Amazon on the other hand, came through with better expectations and the market rewarded it, while Apple barely budged. We’re also monitoring the electric vehicle (EV) space, which has seen several newsworthy developments lately. For one, Tesla is increasingly talking about driverless ride sharing, which is helping to feed its lofty valuation even though this vision may be years years away. Tesla isn’t technically in the Tech sector, but it is often treated as such, which can mean higher multiples. In contrast, traditional car manufacturers like Ford and General Motors command much lower multiples. Looking ahead, the question for Tech companies is always “what’s next?” Tesla’s reaction to competition from China was to cut prices, which caused its stock to drift downward, but now the renewed prospect of driverless vehicles has revived investor interest. If Tech companies can’t sustain these kinds of new and exciting developments, which support higher multiples, then it is likely we’ll see more profit-taking and price adjustments. New tariffs on Chinese EVs could also have wide-reaching consequences. Increased EV purchases would put downward pressure on oil prices, but tariffs would make the vehicles themselves more expensive, which could impact future EV demand.

Bottom Line: Q3 earnings have generally been good, but high expectations for Tech companies do raise some questions about the sustainability of their valuations.

Rate cuts

With the end of the year approaching, we continue to expect more interest rate cuts from both the U.S. Federal Reserve (Fed) and Bank of Canada (BoC), but similarities in their respective trajectories may end there. In the U.S., we see more risk related to the optimism surrounding the rate cycle—investors largely believe that the Fed will be aggressive in cutting rates, but the continuing strength of the U.S. economy means that they don’t have to be. Yes, inflation is lower than it was before, but its decline is not likely to be smooth all the way down to the Fed’s 2% target. The fact that October’s jobs report came in weaker than expected and that August and September’s jobs numbers were revised downward2 increases the likelihood of a 25-basis-point (bps) decrease at the Fed’s next meeting. But long term, if rate cuts don’t materialize at the frequency and magnitude some people are expecting, multiples will have to be adjusted, potentially adding more volatility on top of gyrations from the likely decline in Big Tech earnings growth as mentioned earlier. Canada’s situation is quite different. Our expectation is that the BoC will be more aggressive to shore up a weakening Canadian economy. The BoC’s only concern may be the Canadian dollar (CAD), because if they cut rates quickly while the Fed slows down, there’s the possibility the exchange rate could sink below the $0.70 USD level. That said, there’s still some room for them to run, so we wouldn’t take another 50-bps decease off the table.

Bottom Line: The BoC is likely to continue to be aggressive on rate cuts, while the Fed may move slower than some investors are expecting.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Surprise, surprise: A U.S. job market that simply won’t quit.

Insights

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Source

1Amir Daftari, “Rally in Stocks, Bond Yields, and Bitcoin on Day of Trump Victory,” Newsweek, November 6, 2024.

2Jeff Cox, “U.S. economy added just 12,000 jobs in October, impacted by hurricanes, Boeing strike,” CNBC, November 1, 2024.

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