Domestic equities rallied in dramatic fashion post-election, ending the month with impressive results as small and mid-cap equities outperformed large cap equities by wide margins. The same excitement was not extended to the international markets, however. Developed and Emerging market equities struggled under the blowing winds of tariff fears and the negative implications of policy adjustments currently expected under the Trump administration in 2025.
The optimism of US equity investors is clearly represented by the chart above from The Conference Board.[1]The chart demonstrates a break-out to new-highs for the percent of respondents answering positively to the following question: “Do you think stock prices will be higher over the next 12 months?” While this chart of consumer expectations reflects the current wave of confidence in equities, it does not appear that consumers are appropriately calibrating their expectations for the different set of circumstances facing President Trump compared to 8 years ago.
The table on the previous page highlights the differences in current market dynamics compared to the environment that President Trump inherited in 2016. PE’s and earnings expectations are materially higher; interest rates are much higher; the inflation rate is firmly above the Fed’s target level now while it was below the Fed’s target level 8 years ago; and the budget deficit has more than doubled.
Long-term returns from equities diminish as the price-to-earnings ratio rises above 20. We are in the process of updating our Capital Market Assumptions for 2025 and our historical framework demonstrates that higher starting valuations imply lower expected returns over subsequent timeframes. Therefore, investors would be wise to be vigilant of risk management in times of frothy valuations.
It should be noted that the Fed was holding the Fed Funds Rate below the level of inflation in 2016 to support growth in economic activity. For the last 2 years the Fed has been holding the Fed Funds Rate above the level of inflation to slow the impulse of economic activity and to reduce the growth rate of inflation. In addition, the combination of higher rates and a much wider budget deficit has given rise to a dramatic increase in the cost of interest on government debt as we have highlighted in our recent White Paper titled, “The Coming Debt Crisis – and What to Do about It.” The incoming Treasury Secretary, Scott Bessent, has a gargantuan task at hand to reduce the budget deficit to a more reasonable level over the next four years.
These factors may not matter for the balance of 2024, but they are likely to play an increasing role in the outlook for risk assets after the inauguration in January.
Stocks surged in November on the back of ‘animal spirits’ and the excitement of a return to an ‘America First’ theme:
Stock sector movements were consistent with a pro-growth stance supported by the ‘America First’ theme and the avoidance of international revenue exposure:
Our Navigator framework informs our outlook.
Economy: Strong consumer spending supported healthy GDP growth of 2.8% in the third quarter. There are now 4.5 million fewer job openings compared to two years ago and sensitivity to the unemployment rate should continue to provide support for additional Fed rate cuts. The earnings outlook has progressed throughout the year and has shown a re-accelerating trend since the election.
Technicals: The broad US equity market remains in a positive trend, with many indices trading firmly above moving averages. Despite risks that may emerge from policy uncertainty in 2025, the recent decline in the VIX suggests further near-term upside for stocks, particularly in the US. However, the US does have a rather sizable load of debt ($7 trillion) to refinance in 2025, indicating the potential for upward pressure on interest rates in the coming year.
Sentiment: Investor sentiment readings are slightly elevated relative to long-term averages, reflecting a strong dose of optimism. Consumers are as optimistic about stock prices as they have ever been according to the chart from the Conference Board. Sentiment of Federal Reserve speakers is slightly “hawkish”, suggesting a slower pace in the decreasing trend in interest rates than the market has been anticipating.
Valuation: Mega-caps and high-growth technology stocks have driven large cap valuations to roughly 27x trailing earnings. Yet, valuations for small and mid-cap companies remain reasonable. Bond yields are attractive on an absolute basis, but the premium for owning risky bonds has shrunk to near all-time lows.
In recent communications we have focused our attention on valuations and the implications of a persistently high budget deficit. Even though large cap valuations remain at the high end of historical ranges, there are areas of the market that still offer compelling returns. Eventually, the realities of our fiscal position will have to be addressed even if some of the short-term drivers in the navigator outlook remain neutral to constructive on the near-term outlook.
Our positioning continues to reflect our long-term focus paired with active risk management:
Strong market surges often happen at unexpected times. Many investors believed that a Trump victory was already discounted by the market and the market still managed to surprise investors in November, turning in the best monthly performance for the year. As always, we remind investors to focus on the long-term plan, exposing your portfolio to assets with a solid risk/reward profile while managing short-term risk with prudent diversification.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
[1] Source: Bloomberg; The Conference Board
[2] Source: Goldman Sachs
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