Markets Blog
David Matzko, LPL Research
LPL Research provides its Weekly Market Performance for the week of November 4, 2024. U.S. stocks returned to positive territory, powered by long-anticipated U.S. election results and the second rate cut in the Federal Reserve’s (Fed) monetary easing cycle. European stocks closed the week lower, struggling amid lackluster corporate earnings and heightened tariff concerns, while Asia ended the week higher on Chinese stimulus hopes ahead of Friday’s National People’s Congress (NPC) announcement. Treasury prices ended higher despite fluctuating yields throughout the week, while U.S. election results rippled across global currency markets as the dollar rallied.
Index Performance
U.S. and International Equities
U.S. Equities: After posting two consecutive weekly declines, major U.S. indexes stormed back into positive territory during a hectic week for markets, including the much-anticipated Presidential Election and November Federal Open Market Committee (FOMC) interest rate decision. The S&P 500 surged 4.9% over the last five days to record high levels, eclipsing the 6,000 level late in Friday’s session, and the Nasdaq rallied 5.9%. The Dow Jones Industrial Average closed 5.0% higher on the back of an intra-week industrials surge. Small cap stocks were another notable outperformer, while growth stocks outperformed value.
Election Day finally arrived this Tuesday, with markets braced for a tight race and potentially long hours of ballot counting and a contested result. As few expected, the U.S. presidential election did not need extra innings to decide who would become the 47th U.S. President, with Donald Trump winning enough electoral votes to call the race overnight on Tuesday. Investors piled into stocks on Wednesday on the policy clarity, sending all three major indexes to all-time highs in the best post-Election Day for the S&P 500 in history. The so-called “Trump trade” boosted financials, industrials, and small caps.
Fed day arrived on Thursday without the usual fanfare and nervous anticipation, overshadowed by election results, as equities extended Wednesday’s gains, propelling the S&P 500 to its 50th record high of the year on Friday. Powell and Co. delivered back-to-back rate cuts in the form of a 0.25% reduction, as expected. Additionally, earnings results remained in focus with 103 S&P 500 companies reporting results over the last five days. Semiconductor and technology names dominated headlines, including chipmakers Microchip (MCHP) and Super Micro Computer (SMCI), which slid on soft guidance, while reports from Qualcomm (QCOM) and Arm Holdings (ARM) indicated a comeback in smartphone demand. Despite semiconductor earnings offering mixed takeaways, the artificial intelligence (AI) theme remained broadly intact.
International Equities: European markets printed their third consecutive weekly decline as markets closely monitored central banks and politics within the region, in addition to developments in the United States. Following U.S. election results, European stocks fell as sectors with large U.S. revenue exposure struggled under potential Trump tariff concerns. However, the European benchmark STOXX 600 advanced on Thursday after the Bank of England (BOE) announced another 0.25% rate cut, and German markets advanced on political developments. German Chancellor Olaf Scholz called for a snap election on Thursday after the political coalition remained divided on how to revive the economy. Stocks marched higher on hopes that political changes would bring a much-needed economic boost, but German stocks pulled back Friday as coalition leaders debated election timing. Earnings reports continued to fall short of investor expectations, also weighing on stocks. Among highlights, shares of index heavyweight Novo Nordisk pared gains after topping estimates, while Cartier parent company Richemont fell on weak first-half revenue.
Major indexes in Asia closed the week mostly higher, with India lagging with a modest decline. While U.S. election results and concerns over potential Trump tariffs were in play throughout Asian markets, the big story across the region was Friday’s stimulus announcement in China. Indexes in Hong Kong and mainland China printed solid weekly gains after rallying on stimulus hopes most of the week before trimming gains on Friday ahead of the NPC announcement after the close. Investors debated the impact of fiscal stimulus when countered with increased tariffs, and market-watchers were let down after authorities announced a 10 trillion yuan ($1.4 trillion) package to refinance local government debt — short of spending expectations. Japan, South Korea, and Taiwan ended well in positive territory, as did most of Southeast Asia.
Fixed Income, Currency, and Commodity Markets
Fixed Income: The Bloomberg U.S. Aggregate Index closed the week higher, overcoming a sharp rise in yields (prices lower) on Wednesday following U.S. election results. Yields declined (prices rose) Thursday afternoon in reaction to the Fed’s 0.25% rate cut and continued to pullback at the long end of the curve on Friday. The 10-year yield ended the week three basis points lower, while the rate-sensitive two-year yield added four basis points.
Despite yields finishing lower on the week, for a Treasury market that was already reeling, Donald Trump’s Presidential victory placed additional pressure on rates, as evidenced by the historic move higher in Treasury yields as the Trump victory became clearer overnight on Tuesday. The long end of the Treasury yield curve fared the worst for yields that were on the rise coming into the election, due to a combination of better-than-expected economic data and the potential for increased debt and deficit spending, regardless of who won the election. Wednesday morning’s move higher in yields is a concern (from the bond market) that Trump's economic policies could be inflationary and could change the magnitude of Fed interest rate cuts. Election results did not affect Thursday’s unanimous Fed cut of course, and Fed Chair Jerome Powell gave little insight into the Fed’s rate-cutting path. Market pricing for a December rate cut has declined and, more importantly, the total number of interest rate cuts continues to fall. At one point, markets were expecting 10 total interest rate cuts throughout 2025, which would have taken the fed funds rate down to 2.9%. If markets are right and the Fed pushes back on future rate cuts, that likely means long-term Treasury yields could settle into a higher range than expected, and higher bond yields in general.
Commodities and Currencies: The Bloomberg Commodities Index ended little changed this week, while currencies experienced elevated volatility in the wake of the U.S. election. West Texas Intermediate (WTI) crude ended the week 1.2% higher, experiencing wild price swings. Crude prices sank and bounced back midday on Wednesday as global markets digested the impact of a second Trump term and the potential for increased U.S. output and settling geopolitical conflicts that have driven prices higher. However, prices dipped on Friday after Chinese stimulus failed to impress, and crude traders analyzed increased U.S. inventory and weakening Chinese demand. Precious metals slumped on election results as the U.S dollar rallied. Gold shed 1.8% after sharp declines on Wednesday as Trump’s victory served as a reset for overbought bullion. Silver and copper both ended the week lower. The U.S. Dollar Index added 0.7% thanks to Wednesday’s surge, which sent the euro and yen lower, although the yen trimmed losses in the latter part of the week. Additionally, currencies in dollar- and trade-based markets in Asia came under pressure on election results.
Economic Weekly Roundup
FOMC Cut by 0.25 Percentage Point. As widely expected and well-choreographed, the Federal Open Market Committee unanimously cut the target range for the federal funds rate by 25 basis points (0.25%). The risks to inflation and employment are roughly in balance. The economic outlook still remains uncertain, so the Fed is attentive to both parts of their dual mandate. The Committee specifically called out the easing labor market conditions, including the upward pressure on the unemployment rate. The unemployment rate is still historically low. Market reaction was fairly muted immediately following the release Thursday afternoon. The Fed will update their forecasts on December 18, and the focus will be on 2025, a year where inflation should ease but could remain above the Fed’s target of 2%. We should expect some choppiness heading into the new year as investors reset capital market assumptions.
Investors are searching for equilibrium after reeling from such large moves in rates over the course of the last two months. Predictably, investors had developed unreasonable expectations about the magnitude of rate cuts over the next few quarters and now with a focus on deficits, markets must reorient to reality. Further, resetting expectations is not just for here at home. Global investors are also resetting expectations about growth and inflation in the Euro area and Asia as a strong dollar impacts trade flows.
Goldilocks: Sentiment jumped in November while near-term inflation expectations dipped, creating a potential Goldilocks scenario. Median 12-month inflation expectations fell to 2.6%, the lowest since 2020 and have steadily declined for the past five months. Markets and policy makers are closely monitoring if inflation expectations remain anchored. This will be key for policy decisions, especially in the next few months. Friday’s statement had this comment: “Note that interviews for this release concluded on Monday and thus do not capture any reactions to election results."
Markets put a lower probability of a rate cut in January 2025 as the Fed is unsure about the inflation outlook. Data dependency has its inherent risks as data are often lagged and revised. Given base effects, investors might be disappointed in upcoming inflation data as disinflation becomes harder to experience.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Veterans Day; no economic releases scheduled. Bond markets closed.
Tuesday: NFIB Small Business Optimism (Oct), New York Fed One-Year Inflation Expectations (Oct), Senior Loan Officer Opinion Survey on Bank Lending Practices
Wednesday: MBA Mortgage Applications (Nov 8), Real Average Hourly Earnings (Oct), Real Average Weekly Earnings (Oct), CPI (Oct)), Monthly Budget Statement (Oct)
Thursday: PPI Final Demand (Oct), Initial Jobless Claims (Nov 9), Continuing Jobless Claims (Nov 2)
Friday: Empire Manufacturing (Nov), Retail Sales Advance (Oct), Import and Export Price Indexes (Oct), Industrial Production (Oct), Capacity Utilization (Oct), Manufacturing (SIC) Production (Oct), Business Inventories (Sep)
IMPORTANT DISCLOSURES
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