November 2024 Market Commentary

November 20, 2024

• Donald Trump wins the Presidential election.
• 3Q GDP expands at 2.8% annualized pace.
• October nonfarm payrolls add 12K jobs.
• Returns: S&P 500 -1.0%. Bloomberg US Aggregate Bond index -2.5%.

Markets had a lot to consider in October as they wrestled with the uncertainty surrounding the pending US Presidential election, intensified fighting in the Middle East, the start of third quarter earnings season, and the usual cadence of economic data. In addition, investors struggled with the disconnect between the Fed’s September rate cut and the subsequent rise in longer-term interest rates.

The uncertainty surrounding the Presidential election was removed in early November with Donald Trump’s victory. In the immediate aftermath, markets moved higher on the belief that his second term will be marked by lower taxes and less regulation, a combination markets typically embrace. Trump has also proposed other policy initiatives such as higher tariffs, increased domestic energy production, and the removal of millions of undocumented immigrants, the economic impacts of which are uncertain. The likelihood of Trump’s policy proposals being enacted was enhanced by Republicans taking control of the Senate while retaining control of the House. One likely outcome of that control is that the tax cuts passed in the Tax Cuts and Jobs Act of 2017, some of which were set to expire at the end of 2025, will be extended or perhaps made permanent, including the estate tax threshold.

Despite the uncertainty surrounding some of Trump’s policy proposals, deficit spending is likely to continue unabated. During the campaign season neither candidate made balancing the budget a central issue. Instead, Harris and Trump proposed policies that would increase the national debt by an estimated $4T and $8T, respectively, through 2035, according to the nonpartisan Committee for a Responsible Federal Budget. In fiscal year 2024, net interest expense paid by the government on outstanding debt totaled ~$890B, more than what was spent on Defense, and the third highest expenditure by type, trailing only Social Security and Medicare. Rising deficits require increased debt issuance which could lead to higher future rates to attract necessary investor demand. Higher rates would likely have a negative impact on economic growth.

Outside of the Presidential election, markets remained focused on the economy and the timing and pace of additional Fed rate cuts. When the Fed cut rates by 0.50% in September, it did so due to growing concerns about the strength of the labor markets. After averaging 267K new jobs per month during the first quarter, average nonfarm payroll growth downshifted dramatically to 132K per month between April and August, while unemployment rose from 3.8% to 4.2%. Worried about the relatively quick slowdown and wanting to prevent further deterioration, the Fed cut rates by 0.50%. The September employment report released a fortnight later showed 223K jobs were created during the month, helping assuage some of those concerns and shift market expectations regarding future Fed rate cuts.

Markets were eager to see if October’s report would confirm September’s improvement or resume summer’s weakness. Unfortunately, the report was significantly impacted by hurricanes Milton and Helene as well as data collection issues, providing limited insight into current labor market conditions. Until the November employment report is available, investors will have to rely on other data to try to decipher the state of labor markets. One disappointing trend that reemerged in October was downward revisions to prior months’ data. With the October report, August and September nonfarm payroll additions were revised down by a combined 112K jobs.

Economic activity remained strong in the third quarter with GDP growing at a 2.8% annualized rate, slightly less than the 3.0% registered in the second quarter. Importantly, growth was driven by consumer spending which rose 3.7%, its fastest pace since 1Q23. Spending on goods was particularly strong, increasing 6.0%, while services spending was a more modest 2.6%. Continued growth, and the strength of the consumer, suggested the economy entered 4Q24 with solid momentum, further reducing the near-term likelihood of a recession.

The stronger economic data forced a reconsideration of the timing and size of future rate cuts, in turn placing downward pressure on equities. For the month, large caps (S&P 500) declined 1.0%, while small caps (Russell 2000) dropped 1.5%. International returns fared worse with developed markets (MSCI EAFE) tumbling 5.5% while emerging markets (MSCI EM) dropped 4.4%.

The Bloomberg US Aggregate Index, the broadest measure of the US fixed income market, fell 2.5% in October, its worst month since April, as longer-term yields moved sharply higher despite the Fed’s 0.50% rate cut in September.

In September, yields fell to their lowest level in 16 months following a relatively weak August employment report. That report likely triggered the Fed’s decision to take the more aggressive step of cutting rates by 0.50% at its September meeting. In addition, it fueled expectations that the Fed would remain aggressive with rate cuts at subsequent meetings to prevent further slowing in the labor markets.

Somewhat paradoxically, longer-term rates reversed course and rose steadily throughout October. The initial catalyst was Fed Chair Jay Powell who commented at the start of the month that interest rate cuts are “a process that will play out over some time” and “not something that we need to go fast on.” In his view, “If the economy performs as expected, that would mean two more cuts this year.” That had the immediate effect of reducing market expectations for additional rate cuts in 2024 from three to two. Shortly thereafter, the September employment report showed the economy added jobs at the fastest pace in six months, spurring the largest weekly rise in Treasury yields in nearly two years.

The upward momentum in yields carried forward as September retail sales surprised to the upside, indicating consumers remained willing and able to spend at a healthy pace. The more upbeat economic data led various Fed members to suggest they might take a more measured approach to future rate cuts, perhaps even skipping a meeting if deemed necessary. Some of that caution was validated by the ensuing release of consumer price data (CPI) showing inflation rose faster than expected in September, which helped maintain upward pressure on yields. Yields continued to rise at the end of the month due to international developments, particularly rising oil prices boosted by the prospect of further stimulus from China and continued uncertainty in the Middle East. Markets worried that higher energy prices could stoke inflation, thereby hindering the Fed’s ability to cut rates as rapidly or as deeply as the market had previously anticipated. As a result, Treasury yields ended the month near highs last seen in late July.

The municipal bond market saw similar patterns, with yields ending October at multi-month highs. The 2-year AAA Muni yield mirrored the movement in the Treasury market, with yields rising to the highest level since late July. The 10-year AAA Muni yield reached highs last seen in early June. The accelerated rise in longer yields steepened the muni curve, making investment in outer years more attractive than they have been relative to the short-end of the yield curve since 2022.

Investment and insurance products and services are not a deposit, are not FDIC- insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value.

Information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities. It is not possible to invest directly in an index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Past performance is not a guarantee of future results. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. The views and opinions expressed in this publication are subject to change, at any time, without advance notice or warning.