Policymakers don't want to tank the stock market 🤝

Plus a charted review of the macro crosscurrents 🔀

Policymakers will likely be watching how the stock market reacts to their decisions.

📈The stock market climbed to all-time highs, with the S&P 500 setting an intraday high of 6,012.45 and a closing high of 5,995.54 on Friday. The index gained 4.7% last week, the best weekly performance since last November. It’s now up 25.7% year to date and up 67.6% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: Getting to 'the other side' of election uncertainty 🌤️ and Wall Street reacts to the election results 🇺🇸

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Stocks surged after election results came in and the major news outlets declared former President Donald Trump the winner.

At least some of the rally can be explained by the removal of election uncertainty.

At the same time, the strength of the market response has arguably been at odds with what many economists consider the prospect of worse economic policies under President-elect Trump.

Maybe it’s traders and investors betting that policies bad for the market won’t actually be implemented. After all, what president would want to be affiliated with wealth destruction caused by falling stock prices?

This is an idea that was floated by Bloomberg’s Joe Weisenthal in Thursday’s “Odd Lots” newsletter (emphasis added):

Whereas bond market vigilantes are characterized by what they want to avoid (inflation), stock market vigilantes actually want something: higher profits. And also the higher the profits the better. Furthermore, the stock market is an important driver of wealth for millions of American households, and that also means an important driver of wealth for millions of American voters. When the stock market is down, people feel bad. When it’s up people feel good. If you’re an American politician (or President specifically), you’re forced to be sensitive to this in a very direct way if you want to be elected. It’s not really the same with bonds. The policy-markets nexus is just tighter with stocks.

Furthermore, because the stock market is how people fund their retirements (even for public employees with access to some kind of pension), pay for college, and so on, there’s arguably a limit to how long the American economic system can go without a rising stock market.

While there are many aspects of the economy (like inflation and employment) that can be tricky to define and measure, stock prices are very unambiguous. People’s investment portfolio values are regularly updated down to the penny.

I’d add that those voters with money in the stock market include the many billionaires with whom the incoming president has gotten cozy. And much of these billionaires’ wealth is tied up in the stock market.

Assuming the president does not want to be associated with destroying the investor class’ wealth, this means his administration will likely think twice about going all-in on policies that could prove costly to the companies in the stock market. More from Joe (emphasis added):

This probably puts a constraint on populist, anti-market interventions. You saw this when the trade war with China started heating up under the first Trump administration, and there were days when the market’s reaction was sharply negative to the headlines. Those tariffs didn’t have a massive economic impact, and they didn’t have a massive market impact. But it seems reasonable to think about what a much more aggressive tariff regime would have on equities.

There’s also a constraint that emerges when thinking about re-industrialization efforts (efforts whose future is ambiguous under the next administration). The idea of investing more domestically in factories etc. sounds nice to a lot of people. But it’s a very costly process, with uncertain returns. Technological leadership is also not one-off thing that you just achieve one day. It’s a constant process of risky investment, which (if you don’t have a monopoly) keeps pushing profits further out into the future. It’s not an accident, I think, that China has seen extraordinary technological leaps while its stock market has been incredibly disappointing — endlessly building gigafactories doesn’t leave a lot of money left over for the equity holders. Also compared to the US, the stock market in China is not as important to most households.

Fortunately, policies don’t necessarily have to be enacted for the stock market vigilantes to intervene.

The legislative process is an onerous one. And all along the way, there are usually leaks about how policy proposals evolve and advance. For the proposals that matter to markets, the stock market vigilantes will adjudicate any developments in real-time by bidding prices up and down.

This means that harmful trade policies might actually never see the light of day if the stock market sends a strong enough signal, and the president is paying attention.

Because who would want to be remembered for being one of the very few presidents who was in office when the stock market fell?

Conflict of interests or aligned interests? 🤝

I’m not sure speculating on the financial interests of policymakers, their billionaire backers, and their voting base is a bullet-proof strategy.

It sure sounds like a reasonable one though.

Being exposed to the stock market regardless of whom you voted for has historically been a good idea — and when you are exposed to the stock market, your financial interests are essentially aligned with those calling the shots because they are politically exposed to the stock market (and the economy).

Now to be clear, just because policymakers intend to bolster stock prices doesn’t necessarily mean they’ll be successful at it. Maybe President Trump, regardless of the policy landscape, sees the stock market fall during his term.

The good news is that cumulative returns for investors who are able to put in the time tend to be favorable, even when you are exposed to the stock market during a four-year stretch when prices fall.

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Related from TKer:

• Wall Street reacts to the election results 🇺🇸

• Getting to 'the other side' of election uncertainty 🌤️

• On presidents, the stock market, and the big picture for investors 🖼

• The truth about corporate tax reform and earnings, charted 📈

• Election years tend be good, but less good 📊

• A very long-term chart of U.S. stock prices usually going up 📈

• 10 truths about the stock market 📈

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Review of the macro crosscurrents 🔀

There were a few notable data points and macroeconomic developments from last week to consider:

✂️ Fed cuts rates again, as expected. The Federal Reserve announced its second consecutive interest rate cut. On Wednesday, the Fed lowered its benchmark interest rate target range to 4.5% to 4.75%, down from 4.75% to 5%.

“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the central bank said on Thursday in its monetary policy statement. “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2% objective but remains somewhat elevated.”

(Source: FRED)

As we’ve been discussing for most of this year, I think this whole matter of rate cuts is not that big of a deal. Yes, monetary policy matters, and it can move the needle on the economy. But monetary policy decisions are much more consequential, market-moving events during times of stress or crisis in the markets or the economy. Read more about my argument here, here, here, here, and here.

For more on how we got here and what’s next, read: The Fed closes a chapter with a rate cut ✂️

👍 Consumer vibes improve. From the University of Michigan’s November Surveys of Consumers: “Heading into the election, consumer sentiment improved for the fourth consecutive month, rising 3.5% to its highest reading in six months. While current conditions were little changed, the expectations index surged across all dimensions, reaching its highest reading since July 2021. Expectations over personal finances climbed 6% in part due to strengthening income prospects, and short-run business conditions soared 9% in November. Long-run business conditions increased to its most favorable reading in nearly four years. Sentiment is now nearly 50% above its June 2022 trough but remains below pre-pandemic readings. Note that interviews for this release concluded on Monday and thus do not capture any reactions to election results.”

(Source: University of Michigan)

Weak consumer sentiment readings appear to contradict resilient consumer spending data. For more on this contradiction, read: What consumers do > what consumers say 🙊 and We're taking that vacation whether we like it or not 🛫

💳 Card spending data is holding up. From JPMorgan: “As of 29 Oct 2024, our Chase Consumer Card spending data (unadjusted) was 1.7% above the same day last year. Based on the Chase Consumer Card data through 29 Oct 2024, our estimate of the U.S. Census October control measure of retail sales m/m is 0.59%.”

(Source: JPMorgan)

From BofA: “Total card spending per HH was up 0.9% y/y in the week ending Nov 2, according to BAC aggregated credit & debit card data. Within sectors we report, online electronics, entertainment, transit & airlines showed the most y/y decline since last week. Furniture, department stores and home improvement showed small increases on a y/y basis since last week.“

(Source: BofA)

For more on personal consumption, read: The state of the American consumer in a single quote 🔊

💼 Unemployment claims tick higher. Initial claims for unemployment benefits rose to 221,000 during the week ending November 2, up from 218,000 the week prior. This metric continues to be at levels historically associated with economic growth.

(Source: DoL via FRED)

For more on the labor market, read: The labor market is cooling 💼

🤑 Wage growth is cooling. According to the Atlanta Fed’s wage growth tracker, the median hourly pay in October was up 4.6% from the prior year, down from the 4.7% rate in September.

For more on why policymakers are watching wage growth, read: Revisiting the key chart to watch amid the Fed's war on inflation 📈

💪 Labor productivity inches up. From the BLS: “Nonfarm business sector labor productivity increased 2.2% in the third quarter of 2024, the U.S. Bureau of Labor Statistics reported today, as output increased 3.5 percent and hours worked increased 1.2%. … From the same quarter a year ago, nonfarm business sector labor productivity increased 2.0% in the third quarter of 2024.”

(Source: BLS)

From BofA: “Most of the recent growth is likely a function of pandemic normalization, but increased new business formation and investment could make it sustainable. A sustained pickup in productivity would mean trend growth could stay elevated as the tailwind from labor supply fades and a higher r*.“

For more, read: Promising signs for productivity ⚙️

⛽️ Gas prices tick lower. From AAA: “Faced with a rare November hurricane churning in the gulf, the national average for a gallon of gas only fell by three cents since last week to $3.10.”

(Source: AAA)

For more on energy prices, read: Higher oil prices meant something different in the past 🛢️

🏠 Mortgage rates tick higher. According to Freddie Mac, the average 30-year fixed-rate mortgage rose to 6.79%, up from 6.72% last week. From Freddie Mac: “It is clear purchase demand is very sensitive to mortgage rates in the current market environment. As soon as rates began to rise in early October, purchase applications fell and over the last month have declined 10%.”

(Source: Freddie Mac)

There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖

🏭 Business investment activity ticks higher. Orders for nondefense capital goods excluding aircraft — a.k.a. core capex or business investment — increased 0.7% to $74.1 billion in September.

(Source: Census via FRED)

Core capex orders are a leading indicator, meaning they foretell economic activity down the road. While the growth rate has leveled off a bit, they continue to signal economic strength in the months to come.

For more, read: The economy has gone from very hot to pretty good 😎 and 'Check yourself' as the data zig zags ↯

⛓️ Supply chain pressures remain loose. The New York Fed’s Global Supply Chain Pressure Index — a composite of various supply chain indicators — ticked lower in October and remains near historically normal levels. It's way down from its December 2021 supply chain crisis high.

(Source: NY Fed)

For more on the supply chain, read: We can stop calling it a supply chain crisis ⛓

🏢 Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday rose eight tenths of a point last week to 62.1%, about one point shy of the 63% high reached at the end of January 2024. New York and Houston both experienced record-high post-pandemic occupancy last Tuesday, reaching 68.8% and 72.6%, respectively. Dallas nearly hit its record high as well, rising 2.9 points to 70.7%. The average low across all 10 cities was unchanged from the previous week, again on Friday at 32.9%.“

(Source: Kastle)

For more on office occupancy, read: This stat about offices reminds us things are far from normal 🏢

👍 Services surveys look great. From S&P Global’s October Services PMI: “The US service sector notched up another strong performance in October, helping offset the current weakness of the manufacturing sector to drive a solid pace of overall economic growth again at the start of the fourth quarter. The services economy's consistently impressive growth in recent months has helped the US outperform all other major developed economies. October's strong performance is consistent with GDP continuing to rise at an annualized rate in excess of 2%.”

(Source: S&P Global)

Similarly, the ISM’s October Services PMI signaled growth.

(Source: ISM)

Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than hard data.

For more on this, read: What businesses do > what businesses say 🙊

📈 Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.5% rate in Q4.

(Source: Atlanta Fed)

For more on the economy, read: The US economy is now less ‘coiled’ 📈

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Putting it all together 🤔

The outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.

To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.

We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.

For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.

For more on how the macro story is evolving, check out the the previous TKer macro crosscurrents »

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Key insights about the stock market 📈

Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.

10 truths about the stock market 📈

The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.

The makeup of the S&P 500 is constantly changing 🔀

Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.

(Source: S&P Dow Jones indices via TKer)

The key driver of stock prices: Earnings💰

For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.

(Source: Fidelity via TKer)

Stomach-churning stock market sell-offs are normal🎢

Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.

(Source: JPMAM via TKer)

High and rising interest rates don't spell doom for stocks👍

Generally speaking, rising interest rates are not welcome news for the economy and the stock market. They represent higher financing costs for businesses and consumers. All other things being equal, rising rates represent a hindrance to growth. However, the world is complicated, and this narrative comes with a lot of nuance. One big counterintuitive piece to this narrative is that historically, stocks have actually performed well during periods of rising interest rates.

(Source: BMO via TKer)

How stocks performed when the yield curve inverted ⚠️

There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.

How the stock market performed around recessions 📉📈

Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.

(Source: Goldman Sachs via TKer)

In the stock market, time pays ⏳

Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.

(Source: @BespokeInvest)

What a strong dollar means for stocks 👑

While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.

(Source: FactSet via TKer)

Economy ≠ Stock Market 🤷‍♂️

The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.

(Source: BlackRock via TKer)

Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐

…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.

Peter Lynch made a remarkably prescient market observation in 1994 🎯

Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.

Warren Buffett's 'fourth law of motion' 📉

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Most pros can’t beat the market 🥊

According to S&P Dow Jones Indices (SPDJI), 59.7% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2023. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 79.8% underperformed. Over a 10-year period, 87.4% underperformed. And over a 20-year period, 93% underperformed. This 2023 performance follows 13 consecutive years in which the majority of fund managers in this category have lagged the index.

(Source: SPDJI via TKer)

Proof that 'past performance is no guarantee of future results' 📊

S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.

(Source: SPDJI via TKer)

The odds are stacked against stock pickers 🎲

Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.

(Source: SPDJI via TKer)