Monthly CIO Update | November 2024

Market Wrap

US equities were modestly lower in October with the S&P500 (-0.9%) down for the first time since April and the Nasdaq (-0.5%) breaking a three-month streak of gains as well. Small caps continued to underperform with the Russell 2000 (-1.4%) trailing S&P500 for the third straight month. But the major indices rallied to fresh all-time highs to close the first week of November (S&P500 +4.7%, Nasdaq +5.4%, Russell 2000 +8.6%, Dow Jones +4.6%), logging some of the strongest weekly gains YTD as the market reacted to President Trump’s election victory.

The strength in US equity markets has continued despite enduring the largest Treasury yield sell-off in over two years. Yields moved higher across the curve, with the 2Y yield up 60bps since the end of September, now back above 4.25%, and the 10Y yield up nearly 50bps, back near 4.30%. The month's Treasury weakness was driven by a repricing of various factors including:

1. Growing scrutiny over the debt/deficit levels.

2. Potential Trump/red wave policy impacts (spending, immigration, tariffs).

3. Increasing optimism around soft/no-landing scenario following strong economic data.

4. Ultimately higher inflation expectations given the above, resulting in a more hawkish Fed.

September core CPI came in hotter than expected (+3.3% y/y), accelerating for the first time since early 2023 and raising questions as to whether inflation has truly dissipated. Q3 GDP increased by 2.8%, bolstered by a pickup in consumer and government spending. US consumer confidence also jumped 9.5 points to 108.7, the strongest monthly gain sinceMarch 2021. However, the Fed cut rates by 25bps at its November meeting, a decision that was likely cemented by October’s non-farm payrolls increase of just 12,000 jobs.

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Investment Outlook

MACRO: Better-than-expected economic data, PresidentTrump’s victory in the election and inflation concerns have driven the market to reprice rate cut expectations. The year-end median fed funds rate rose from 4.2% at the beginning of October to 4.5% and the odds of a pause at the December meeting increased from 20% in mid-October to 35%. While the market-implied expectations are closer to our forecasts now than before, we expect the Fed to remain on autopilot in the near-term, adding 25bps of easing in December and at least an additional 50bps through 2025. This alongside pro-growth fiscal policy from President Trump is likely to add significant stimulus into an economy which is already benefitting from relatively easy financial conditions. Against this backdrop, a soft landing remains our base case for the economy.

EQUITIES: US equities have proven resilient amidst rising term premium, which we see as largely attributable to improvements in the economic growth outlook. Large cap equities continue to trade at a premium relative to historical levels (S&P500 NTM P/E currently 21x vs. a 10-year average of 18x), which would suggest possible derating. However, we believe that corporate earnings growth will be bolstered by above-trend GDP expansion, subdued inflation and lower interest rates. The S&P500’s premium valuation is further supported by best-in-class net ROE and net profit margins relative to global indices. On a sector basis we remain overweight: 1. Technology as we see mega cap tech capex driving a flywheel of innovation, new market creation and revenue generation that outweighs regulatory scrutiny; and 2. Financials behind a steepening yield curve, deregulation under the Trump administration including the easing of Basel III capital requirements and a rebound in M&A activity. More broadly, we expect the unwinding of downside hedges, resilient consumer impulse, and the removal of the election overhang to offer additional near-term upside.

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Charts of the Month

While the November elections can result in divergent policy paths and market impacts, stocks typically do well once the election overhang is removed, independent of the outcome. Since 1984, the S&P500 1-year total return averaged 17.6% and stocks have compounded overtime, regardless of which party was in office. Long-term, the Fed, the economy and company fundamentals have proven far more important for equity market returns than who is currently sitting in the White House.

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