Mission Wealth Market Update 11/7/24

Market Update for 11/7/24

All eyes were on Washington this week, with the U.S. election results Tuesday night through Wednesday morning and the Fed announcing its interest rate policy Thursday. Please see the thoughts provided by the Investment team below:

• Please do not let your personal political emotions dictate your investment portfolio strategy: the economy and the market have performed well over time, regardless of who wins an election.
• Under the upcoming Trump administration, we expect an increase in tariffs, potential tax cuts, and an extension of the Tax Cuts and Jobs Act of 2017.
• The Fed announced a 0.25% interest rate cut today, November 7th, and we believe the Fed will take a measured approach to future interest rate cuts.
• We continue to monitor developments closely and believe our portfolios are well positioned to continue meeting our clients’ long-term goals.

Election Update

Regarding the election’s outcome, and as it pertains to investing, the overarching theme is not to let your political feelings dictate your investment portfolio. As we’ve discussed, we’ve seen economic growth and a long-term upward trend in the stock market regardless of who wins an election. The economy and the market have many structural components that are usually difficult to change very quickly, especially when congressional involvement is in play. Moreover, to the extent changes occur, companies have historically shown a consistent ability to adapt to those new realities. 

Once the results were known, the outcome took away the political uncertainty and market volatility subsequently dropped. Part of the recent appreciation in the stock market may also have to do with expectations for potential lower corporate tax rates under a Trump administration. 

Tariffs and Tax Cuts Likely

While much is yet to be determined regarding taxes and policy, under a Trump administration, we do anticipate an extension of the 2017 Tax Cuts and Jobs Act. President-elect Trump has indicated a possible reduction in the corporate tax rate from 21% to 15% and proposed no taxes on tips, overtime, and auto interest payments. Trump has also clearly communicated that he will likely increase tariffs on goods imported into the U.S. 

In terms of timeline, tariffs may be implemented relatively quickly, while any tax changes will realistically take longer and may not be passed until next summer. Tax law changes can be somewhat tricky and time-consuming, given the seven steps of the formal tax legislative process that need to take place. Economists broadly consider the implications of these policies likely inflationary, and we have seen interest rates move higher as a result.

Fed Cuts Rates

Turning to the Fed, it announced a 0.25% rate cut in the Fed funds rate at today’s Federal Open Market Committee (FOMC) meeting, bringing the target range to 4.50% – 4.75%. This cut was largely anticipated (the market had assigned a 99% probability of a 0.25% cut immediately ahead of the announcement). The statement noted that inflation has improved but remains elevated, the economy continues to expand steadily, and the unemployment rate remains low, though labor market conditions have generally eased. At his subsequent press conference, Fed Chair Powell indicated the Fed considers current monetary policy as still restrictive and on a path towards more neutral policy, though he emphasized the data-dependent nature of the Fed’s monetary policies.

Expect A Measured Approach

With the economy likely to experience a soft landing and inflation still elevated above the Fed’s 2% target, we anticipate the Fed will take a measured approach to future interest rate reductions and not be as aggressive in cutting rates as the market had previously anticipated.

The market has since ratcheted back its expectations. It now anticipates two or three rate cuts in 2025, less than the four rate cuts indicated by the Fed’s most recent economic projections (“dot plot” forecasts). With the market now pricing in a more measured Fed, yields have moved higher, with the benchmark 10-year Treasury yield currently around 4.3%, after being close to 3.6% in September.

Investment Implications

Bond yields are now more attractive today and may be supported as the Fed continues to cut rates, albeit at a measured pace. Many of our preferred bond funds are yielding mid- to high-single digits, and the current yield has historically been the greatest predictor of future bond returns. Core fixed income also provides enhanced diversification benefits within a well-diversified portfolio, offering stability and consistent income. This may be especially important as we return to a more normal monetary policy and yield environment.

Historically, a Fed rate-cutting cycle combined with a soft-landing economic outcome has been supportive for the stock market. However, we are somewhat cautious about valuations, which appear stretched, particularly for select mega-cap names. We continue to favor alternative investments, which we believe offer enhanced risk-adjusted return potential and less correlation to the broader market.

As always, please don’t hesitate to contact us with any questions.