November 2024 Commentary

November was a standout month for U.S. markets, delivering the strongest monthly gains of the year. The stock market surged in response to Donald Trump’s election victory, with investors rallying around the promise of policies aimed at boosting corporate profits. His agenda of tax cuts, deregulation, and infrastructure investment has reignited enthusiasm for America’s economic prospects. While rhetoric on tariffs and trade policies raised concerns in certain sectors, such as autos, equity traders largely dismissed fears, focusing instead on the potential for an economic tailwind under the new administration.

As we move into December, a historically robust month for equities, there’s hope that the momentum will carry through to year-end. The S&P 500 has already climbed an impressive 26% year-to-date, underscoring the resilience of U.S. markets. With optimism running high, the so-called "Santa Claus rally" seems more like a probability than just a seasonal wish, capping off a year where the U.S. has truly put "America First" in both policy direction and market performance.

The U.S. economy demonstrated its remarkable resilience in November, leaving many analysts questioning what might disrupt its momentum. Early in the month, that answer seemed to come in the form of two hurricanes and a major strike at Boeing, one of America’s largest manufacturers. Job creation plummeted in October to just 12,000, significantly below expectations of 100,000 and far from September’s revised 223,000. While unemployment held steady at 4.1%, downward revisions to August and September payrolls, totaling 112,000 jobs, signaled a more pronounced slowdown. The disruption from Hurricanes Helene and Milton, coupled with labor unrest, made it challenging to disentangle temporary factors from broader economic trends.

Despite this stumble, the labor market remains fundamentally strong. Over the past three months, job growth has averaged 148,000 per month, reflecting a gradual cooling from earlier in the year. This deceleration aligns with the Federal Reserve’s objectives, as it seeks to temper economic overheating and bring inflation back to target.

Inflation, meanwhile, is showing signs of a bumpy but steady descent. Consumer prices rose 2.6% in October from a year earlier, accelerating slightly from September’s 2.4% pace, while core prices (excluding food and energy) climbed 3.3%. Although still elevated, these figures suggest inflation is gradually easing. The Federal Reserve’s preferred inflation gauge, the core personal consumption expenditures (PCE) index, increased 2.8% year-over-year in October, further affirming this trajectory. Markets interpreted these numbers optimistically, pricing in a high likelihood of another quarter-point rate cut in December.

Consumer sentiment mirrored this cautious optimism, rising to 71.8 in November, its highest level since April, according to the University of Michigan. The increase reflects renewed confidence in the economic outlook, buoyed by hopes that President-elect Trump’s pro-growth policies will bolster household financial stability. While inflation remains a key concern, prices are 20% higher than at the start of President Biden’s administration, many Americans seem hopeful about a brighter economic future.

The Federal Reserve’s November decision to cut interest rates by a quarter point to a range of 4.5% to 4.75% reflects growing confidence in the U.S. economy’s resilience and ability to sustain growth without stoking inflationary pressures. Chair Jay Powell highlighted productivity gains and steady progress toward the Fed’s 2% inflation target, supported by cooling housing costs and moderating price trends in goods and non-housing services. Policymakers also noted an improved assessment of the economy’s capacity to produce, thanks to recent productivity enhancements, which could pave the way for sustained expansion without inflationary strain. This economic backdrop provides fertile ground for sectors like technology and industrials, which stand to benefit from both innovation-driven growth and stable monetary policy.

The road ahead for the U.S. economy and markets is paved with opportunities but not without risks. The Conference Board’s Leading Economic Index® (LEI) declined by 0.4% in October, continuing its downward trend over the past six months. Weakness in manufacturing orders, rising unemployment claims, and declining building permits, amplified by hurricane disruptions, suggest lingering challenges. However, these economic headwinds have not shaken market optimism. The S&P 500 has achieved an impressive 53 record highs this year, while small-cap stocks, previously laggards, are now surging with a 20% year-to-date gain, catching up to the S&P 500’s 26% advance. Small caps, less exposed to international markets, are expected to benefit from President-elect Trump’s “America First” agenda, which includes protectionist trade policies and domestic economic priorities.

Still, the outlook for small caps comes with a mix of promise and caution. While they’re gaining momentum, their reliance on debt financing makes them sensitive to shifts in monetary policy, and the Federal Reserve’s slower pace of rate cuts could weigh on their future performance. Similarly, semiconductor stocks, which have been stalwarts of the tech rally, are under pressure as AI-driven fervor cools and global trade uncertainties loom. Despite these sector-specific concerns, the market is showing a healthy broadening of leadership beyond technology and AI, with gains spreading to other industries like industrials and energy, which are poised to benefit from anticipated infrastructure spending and deregulation under the new administration.

The U.S. has lived up to its promise in 2024, posting 9% earnings growth over the past year compared to just 1% for the rest of the world. Driven by resilient economic fundamentals and the surging AI theme, the "Magnificent Seven" tech giants have seen earnings rise 45%, with broader sectors poised to benefit as AI adoption expands. Utilities, industrials, energy, and real estate are increasingly attractive, supported by the structural demand for AI infrastructure and the pro-business policies of the incoming administration. Corporate tax cuts, deregulation, and infrastructure spending are expected to further fuel U.S. economic leadership and market performance.

Looking ahead to 2025, investors should remain optimistic. While valuations are stretched, the combination of easing inflation, resilient consumer spending, and continued innovation offers fertile ground for earnings growth. The U.S. remains the cornerstone of global equity markets, and prudent investors should stay focused on opportunities across diverse sectors. With thoughtful positioning, there is every reason to believe that America’s economic strength and innovation will drive continued success in the year ahead.