Market Pulse: Post Election Market Reaction

After last week’s election, we want to share some insights on how the market has reacted and what it could mean for your portfolio moving forward.

The initial market response has been similar to what we saw after the 2016 election, with investors adjusting their expectations based on the outcome. The key factors influencing this shift include expectations for more fiscal stimulus (like extended tax cuts), possible deregulation, and the continuation of trade tariffs. Stocks that have risen the most are those that are believed to benefit from these policies.

• US mid- and small-cap companies were the leaders in the rally last Wednesday, with the S&P 400 (mid-cap) rising 4.16% and the S&P 600 (small-cap) up 6.05%. These companies typically generate most of their revenue within the US, meaning they are less exposed to the risks of international trade wars. We have already favored those two segments within our growth pool due to their attractive valuations compared to the broader market, which we believe will help drive returns in the future. (Data as of 11/6/2024 for S&P 400 and S&P 600 daily returns).
• As a whole, the US large companies (S&P 500 index) rallied +2.5%. As a subcomponent, the Financials, Industrials, and Energy sectors performed the best, as investors believe potential deregulation and protectionist policies will benefit these industries. On the other hand, Utilities, Consumer Staples, and Real Estate companies saw declines. This is because the expectation of increased government spending has caused U.S. Treasury yields to rise, which creates challenges for sectors like Utilities and Real Estate that rely heavily on borrowing.
• International stocks declined by 0.9% (ACWI ex-USA index) due to concerns about tariff risks and the strengthening U.S. dollar. A strong dollar can hurt both foreign stocks and U.S. exports. When U.S. Treasury yields rise, the dollar usually strengthens as well.

As mentioned earlier, the current reaction and 2016 look nearly identical. International stocks similarly sold off but staged a strong rally the following year.

It’s also important to note that the market’s reaction in 2020 was similar. Election outcomes matter and impact many areas of life. At the same time, we believe they should not have material impact on portfolio construction. An all-weather diversified approach is better suited to address a broad range of potential outcomes going forward. 

In today’s environment, it can be tempting to make investment choices based on initial market moves or campaign promises, but this often doesn’t lead to the results investors expect. A good example of this can be seen when comparing the performance of the clean energy and oil & gas sectors under the last two administrations:

On the other hand, the 10-year Treasury yields are acting differently than usual during a rate-cutting cycle by moving in the opposite direction and rallying higher. This shift in yields is influenced by a larger fiscal deficit, but it could also be a sign of higher economic growth and more persistent inflation due to upcoming stimulus. Our approach to keep duration strategically light relative to the broad bond market continues to be a good place for our Lifestyle Protection Pool, helping to lessen the impact of these unusual market conditions.

One key difference compared to 2016 is that interest rates are much higher now, which could limit the ability to implement certain policies. When long-term Treasury yields rise, they put pressure on a credit-driven economy. Higher interest rates on mortgages, auto loans, credit cards, commercial loans, and other types of borrowing can eventually slow down economic growth. As Michael Cembalest from JPMorgan noted, the direction of 10-year Treasury yields may give us clues about which policies will be put in place and how effective they will be.

Lastly, the main goal of a goals-based approach and a diversified portfolio is to prepare for a wide range of possible outcomes, like the current market situation, while staying focused on achieving your most important financial objectives. At the same time, we’re constantly monitoring the market to take advantage of major dislocations as they arise.

If you have any questions or want to discuss the current environment further, please reach out to your investment advisor.