Trump Trifecta; Inflation behaves; UK Growth Slows
Author: Tom McGrath CIO, 8AM Global
Market Review
Republicans retained their narrow majority in the US House, securing unified control of Congress and the presidency under Donald Trump. This trifecta strengthens Trump’s ability to push through key agenda items, including extending and expanding tax cuts, tightening immigration controls, and reducing regulations on Wall Street and the energy sector. The GOP’s win eliminates the threat of Democratic-led investigations into Trump and diminishes hopes for oversight of his policies. However, the slim Republican majority in the House may still face challenges from internal divisions, particularly on contentious issues like US aid to Ukraine. Most of that had already been priced in, as market reaction to the confirmation was limited.
After the fireworks of the week before last, it was a steadier, if a somewhat poor showing from equity markets especially those outside the US as investors begin to digest the thought of an unencumbered, more powerful Trump.
Although we are yet to find out who is on his economic team, his initial nominees are; for Attorney General, Matt Gaetz (under investigation for sexual misconduct and drug use) and for Secretary of Health and Human Services, Robert F. Kennedy Jr (a well-known vaccine sceptic). Readers should note the falls in Moderna and other key vaccine producers last week… It is becoming absolutely clear that he will focus exclusively on America first, cut taxes, and deregulate and spend on infrastructure and other pet projects.
My guess is that he will judge the level of his success by the level of the stock market, as he alluded to in his first term, and I wouldn’t bet against a successful presidency judged by that benchmark alone. Having had the pleasure of managing money through a few bull markets now, I concur entirely with this quote from Warren Pies;
“Sometimes the hardest thing to do is just ride a bull market”.
The temptation to take profits and rapidly reduce risk allocation grows greater as markets move higher, but bull markets typically last until euphoria sets in and the last bears capitulate, and I don’t sense we are anywhere near that point right now.
A Cautious Fed Update
Federal Reserve Chair Jerome Powell delivered a cautious outlook on the economy last week. He emphasised the importance of a measured approach to interest rate cuts as inflation risks persist. Speaking in Dallas, Powell pointed to strong US economic growth and a resilient labour market as reasons to avoid rushing monetary policy decisions. While job gains in October were subdued due to temporary factors, unemployment remains historically low, underpinning overall economic stability.
Powell highlighted progress in bringing inflation closer to the Fed’s 2% target but acknowledged lingering risks. Recent data showed a slight uptick in consumer and producer prices, keeping inflation above target at 2.3%, or 2.8%, excluding food and energy. He reiterated the Fed’s commitment to ensuring inflation returns sustainably to 2%, cautioning that the path forward may be uneven and require ongoing vigilance. His remarks, emphasising a slower, data-driven approach, tempered market expectations for additional rate cuts. That probably accounts for the fall in equities last week and the rise in Treasury yields as traders adjusted their forecasts for a December cut. Powell framed the Fed’s policy recalibration as a shift toward a neutral stance, balancing support for economic growth with inflation management.
Expecting Fewer Cuts
The Federal Reserve’s recent rate cuts—lowering the benchmark rate to a range of 4.5% to 4.75%—may have come prematurely. Bond yields have risen in response, signalling growing market scepticism about the wisdom of continued easing. While inflation risks today do not mirror the explosive price surges of the 1970s, I think a cautious approach is warranted. As mentioned earlier, strong productivity gains reduce the likelihood of a second wave of inflation, especially as geopolitical risks remain lower, and the US, now a major net energy exporter, is less vulnerable to external shocks like oil price spikes. But will they be enough to counter the potential loss of immigrant workers under Trump? We shall see.
Given this context, it is clear that the Fed must prioritise patience. We may get another one or two rate cuts of 0.25% this year and in the first quarter of 2025, as these have been telegraphed, and the Fed won’t want to shock the markets. But then I expect a long pause as inflation, particularly in key sectors, needs more time to align sustainably with the 2% target before any further rate cuts are considered.
A tinder box?
Geopolitically, the easing of current global crises appears increasingly likely, reflected in recent declines in gold and oil prices. Improved economic conditions and fiscal reforms may enhance federal revenues even as debt continues to grow, with figures like Elon Musk advocating for tighter spending controls. This balance could see GDP growth keeping pace with rising government debt.
If I were parachuted down to earth and were completely unaware of all that had gone before, I would be arguing that the Fed should be holding rates steady at the moment, with a view to lifting them at the first sign of inflation ticking higher. The fact that the Fed is likely to still cut from here could risk reigniting inflation and fuelling an equity market surge that could culminate in a speculative melt-up. If you look at the amount of money backed up in money market funds, that’s a lot of lighter fuel for the stock market!
But the fundamentals justify higher equity markets as corporate earnings projections underscore this optimism, just as the case for holding bonds and cash diminishes (yields likely to head higher as deposit rates of interest fall). Despite temporary setbacks from strikes and hurricanes, S&P 500 earnings per share (EPS) for 2024 remain robust, up 8%+ year-over-year. Trump’s fiscal policies are expected to accelerate EPS growth in 2025 and 2026. Oh, and expect this growth to extend beyond the “Magnificent-7” stocks, broadening to include a wider range of industries benefiting from tax cuts, deregulation, and productivity gains. Profit margins are poised for record highs, driven by structural changes in taxation and regulatory frameworks.
So, I would expect valuation multiples, which have risen as recession fears recede, to remain elevated, supporting bullish price targets for the S&P 500. Yardeni Research, which has been accurately forecasting market trends, has just recently upped its earnings projections and index targets, with year-end index levels forecasted at 6100 in 2024, 7000 in 2025, and 8000 in 2026.
Wouldn’t that be nice?
US Exceptionalism is set to continue?
In case you question the dramatic outperformance of US equities, there is a self-evident and justifiable reason why the American market has been outperforming, and to paraphrase, ‘it’s the earnings stupid’. Forward earnings per share (EPS) for the US MSCI stock price index is flying to new record highs, while the rest of the world’s forward EPS has remained relatively flat in recent years. I wouldn’t be surprised if that trend continues, and the gap extends. Despite the elevated valuations of US equities, it does not feel like a time to be underweight in the market, especially as an inward-facing America is likely to hinder the progress of Europe, Asia, and Emerging Markets.
What about Europe, Asia and Emerging Markets?
Last week, almost without exception, digesting the potential fallout of Trump tariffs was felt as a modest pullback across global markets. In the interest of brevity and, in the absence of any significant market news not affiliated with Trump, we’ll move on!
UK – Down to Earth with a Bump.
The UK economy contracted unexpectedly in September, with GDP shrinking by 0.1%, marking a sharp slowdown from earlier growth this year. Quarterly expansion was limited to just 0.1% in the third quarter, falling short of economists’ expectations and reflecting weaker momentum across key sectors. Services, the backbone of the economy, grew only 0.1%, while production fell slightly. These figures reveal a cooling economy despite earlier resilience.
Finance Minister Rachel Reeves expressed dissatisfaction with the economic data but reaffirmed her commitment to driving growth through investment, reforms, and fiscal initiatives. According to the Bank of England, the Labour Government’s tax-raising budget is projected to boost GDP by 0.75 percentage points within a year. However, concerns over geopolitical risks and global fragmentation temper expectations for a strong recovery.
UK Megafunds?
Despite recent weakness, some economists expect the economy to gain momentum in the coming quarters as government spending increases and inflationary pressures subside. The British economy faces a challenging mix of sluggish growth, external pressures, and cautious monetary policy.
Chancellor Rachel Reeves delivered her first Mansion House speech on November 14th, presenting significant reforms to stimulate the UK’s financial sector and economy. She criticised post-2008 financial crisis regulations for stifling innovation and announced plans to revamp them to encourage a more dynamic and competitive economic environment, balancing risk management with growth.
A key proposal was consolidating the UK’s 86 local government pension schemes into eight large “megafunds,” which aim to unlock £80 billion for infrastructure and high-growth business investments by 2030. Reeves, joined by Bank of England Governor Andrew Bailey, also called for rebuilding economic ties with the EU to mitigate Brexit’s impact and enhance trade and economic growth.
The Chancellor introduced a pilot program for a digital government bond using distributed ledger technology, aiming to modernise government securities issuance and position the UK as a financial technology leader. She also addressed the need to combat financial fraud, urging technology and telecommunications firms to intensify efforts and requesting an update on an expanded fraud strategy by March 2025.
China
China’s latest economic data suggests that the government’s stimulus measures are beginning to stabilise the economy, with retail sales growing at their fastest pace since February and nearly matching industrial output growth. October’s 4.8% retail sales increase, surpassing expectations, indicates strengthening domestic consumption—a critical pivot as Beijing braces for potential US tariff shocks under Trump’s incoming presidency. Industrial production remains solid, though slightly slower, while fixed-asset investment and the urban jobless rate point to steady, if cautious, improvement.
The government’s measures to boost consumer spending, such as subsidies for appliances, vehicles, and other goods, are yielding results, with sales of home appliances and cosmetics surging. These trends suggest that Beijing is effectively rebalancing its economy towards domestic demand, particularly in light of external trade pressures and geopolitical challenges. However, deflation risks and tepid credit growth highlight the need for sustained policy support to solidify the recovery.
China’s focus on consumption-driven growth is a positive development, especially as policymakers prepare for potentially disruptive US trade policies. If Beijing continues to bolster domestic demand while managing external risks, the outlook for stable and sustainable economic growth remains encouraging.
After China had closed, as if to underline the improvement in retail sales, we got news of Alibaba’s better-than-expected Q3. The company reported a 5% year-over-year revenue increase and strong growth in its AI-related cloud business, signalling a recovery in consumer demand and business investment. Supported by Beijing’s focus on boosting domestic spending and consumption, Alibaba’s performance underscores the effectiveness of these policies in stabilising key sectors of the economy. Despite this positive news, the share price still ended the US session some -2% down.
Its possible, even with Trump’s arrival, the authorities will be able to keep the revival of their equity market going, but they face new and significant headwinds in this new Trump era.
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