2024 Q4 Market Outlook
We're certainly getting closer to year-end, and many have had questions about the election and what to prepare for through the end of 2024. In this market outlook, we will be covering Mainsail’s perspective on the election impacts and what to watch ahead of year-end.
As of 11/8/2024, so far it appears that the market has had a strong reaction to the news of Trump’s election into office. In fact, the S&P 500 showed the largest post-election day in market history. In general, broad US stock market indices are up since the news. Only time will tell how things will settle, whether this rally can continue, or if we see a turn in momentum as emotions settle and we get back to fundamentals.
There are a few broad considerations to weigh in the market’s reaction to the news so far:
US stock market’s positive reaction, especially in the small and mid-cap space
Risks to international equity markets increases
A stronger dollar ahead is likely due to possible spending and tariffs
Longer term treasury rates may be more likely to stay higher for longer now, regardless of the Fed’s path
Consumer staples and utilities seem to be sectors that have been hit the hardest so far
During Trump’s prior term, the top performing sectors were technology, consumer discretionary, and health care, followed by materials and industrials - please do keep in mind past performance does not suggest future results
The most relevant news from our perspective in this election cycle is what seems likely to be a red wave across Congress as well. Given the probability that Congress will also be primarily Republican, we will be keeping a very close eye on changes in policy during the early days of Trump’s presidency to determine what they try to get through and how this will impact the markets. We will continue to watch as policy and market reactions unfold. For now, the potential for tariffs and other promises from the Trump campaign are suggesting possible themes around US based investments, higher inflation, yields higher for longer, a stronger dollar, and risks to international stocks.
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Although we may continue to see short term impacts based on the election itself, it is also important to consider how potential taxes, tariffs, programs, and the rhetoric from both sides may impact the economy moving forward. Both parties have shared their thoughts around the economy. Whether reform comes from taxes or tariffs, on a high level, both can create similar economic impacts. Specific taxes or tariffs applied will differentiate where the impact is felt in economies, sectors, or regions. Generally, an increase in either can reduce incentives and create economic slowdown.
To put this in perspective, imagine you have two investments available to you. Investment A, which you expect 10% tax free and Investment B, which you expect the same 10% return but will have to pay a tax on any gains. You are likely to choose the tax-free investment or expect a higher return from the taxable investment to offset that tax drag you might experience. At the end of the day, you will end up with less money with Investment B given the tax impacts that this scenario would create. This is why you see the government offers tax breaks in certain areas that they hope to spark investment and is why higher taxes can reduce the incentive to invest. Similarly, tariffs often will dictate lead those impacted to seek alternatives to avoid it, again reducing incentive for trade where tariffs exist. On the other hand, lower tax and tariff thresholds can attract investors and create opportunities in that space.
Additionally, I want to highlight that it may be unlikely either party's current agenda will be carried out in its entirety. There are many wild claims being thrown out there to try and attract voters. We are very closely watching the House and the Senate makeup to see where things may go from here, as any gridlock will reduce the chances of these promises occurring. Keep in mind, markets like certainty. As strange as it may sound, the checks and balances in Washington where little changes provide that certainty, at least for two years, and often is a good thing for markets.
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As we approach year end, there are some additional considerations to highlight. The first is interest rates. The Fed has started cutting rates and as rates come down, there is likely a bit of a shift. As that happens, it will be important to find vehicles for growth. Cash has been a great tool over the last year or so, but as rates drop, cash will become less valuable and bonds, or the ability to act quickly with any cash holdings, will become important as we look ahead.
Secondly, we are stepping into the core of the earnings season, and there are high expectations at the moment. High earnings expectations are generally a great sign of confidence in the markets. However, more recently, many analysts have pulled back those expectations and lowered their forecasts. As earnings season continues, it will be important to review this data in full for a glimpse into what to expect ahead.
The third, area we need to watch closely is the war in the middle east. The reality is, it is very difficult to say how things will unfold. It is important to watch closely, be ready, and nimble to adapt if something needs to shift quickly.
This year, the lead up has been to this last quarter of the year. All eyes have been on the election as November gets closer. Although we are drawing closer to clarity of who sits in the oval office, it is important to separate facts and data from rhetoric and campaign promises. It is very likely we will experience short term volatility as election day gets closer, but it is important to keep a long term focus. Historically elections create a lot of angst and cooler heads prevail as we step into the new normal after the election itself. Watching the current earnings, interest rates, and policy as we have more information will help to shape market direction heading into late 2024 and 2025.