Much of the uncertainty overhanging the U.S. economy was lifted after Tuesday’s election, as the “Blue Wall” manufacturing states of Michigan, Pennsylvania and Wisconsin ultimately determined who won.
With the election results so clear, I am anticipating a strong year-end rally, fueled by an early “January effect” as well as optimism for the New Year. With GDP growth possibly accelerating to a 4% to 5% annual pace next year, the Fed could curtail more key interest rate cuts in 2025, but at least we have some interest rate cuts this year to help spark the housing sector and other interest rate-sensitive industries.
The bond vigilantes had been anticipating a Trump victory for the past several weeks, bidding up long-term yields in anticipation of higher budget deficits and more robust economic growth under Trump. Not only were these bond vigilantes proven right, but 10-year Treasury bond yields shot up 17 basis points after the Presidential election and have risen over 80 basis points since the Fed’s September 18th rate cut.
Here are the most important market news items and what this news means:
- Naturally, the prospect of Trump 2.0 is getting many investors excited, especially since it looks like the Republicans will keep control of the House, so there are not expected to be endless investigations and impeachment hearings like Trump had in his first term. Furthermore, Trump improved in every single county in the U.S. compared to the 2020 Presidential election, with California being the biggest improvement for picking up the highest percentage of votes compared to 2020. As a result, Donald Trump has a mandate with majorities in Congress, so he is expected to implement pro-business reforms and initiatives to stimulate economic growth, like his “drill baby, drill” pledge to unleash the U.S. energy sector.
- In the meantime, COP 29 is underway this week in Azerbaijan, so it will be interesting if concerns about Trump 2.0 emerge. The big problem with the COP events in recent years is that they typically declare “hydrogen” as the clean fuel of the future but then never offer a viable road map for economies to shift to hydrogen since it remains cost-prohibitive, especially green hydrogen, which requires a lot of water. COP 28 was held in UAE, which has over 140 desalination plants, but despite the UAE offering plenty of water to make green hydrogen, the transition has gone nowhere, probably because you have to use carbon-based fuels for desalination, so green hydrogen is not yet cost-effective.
- Since the last three COP events have been in energy regions (Scotland, UAE, and Azerbaijan), the hope is the energy industry can aid with the green transformation, but the hope of being carbon neutral by 2050 looks to be increasingly futile. I should add that the interim goal of COP 29 is to finalize the terms that rich countries will loan to poor countries to make a green transition. Interestingly, the green movement in some rich countries appears to be losing momentum. As an example, the Green party in Germany had only 10% of the vote in recent regional elections and it will be interesting what percentage they get in the upcoming elections since Chancellor Olaf Scholz’s collation with the Green party has collapsed.
- The other big “green” place is California and Governor Gavin Newsom has called for a special session of the legislature to “harden” many of the state’s progressive policies. I suspect that Gavin Newsom will strive to protect California’s vehicle and utility mandates from federal influence. The truth of the matter is that as long as the green transition remains expensive, it will receive pushback from voters, which may explain why Donald Trump’s largest gain in county votes since 2020 was in California. So, I, for one, will be very curious if the green movements in California and Germany lose any momentum in the upcoming months.
- President-elect Trump asked Congressman Mike Waltz to be his National Security Advisor. Waltz has been a big critic of the seemingly endless funding for Ukraine and a big China trade critic. Another China critic, Senator Marco Rubio, is reported to be Trump’s choice for Secretary of State. An epic trade showdown appears to be shaping up with China, which recently reported record exports after encouraging its manufacturers to boost production. Deflation is a looming threat in China since overproduction continues to reduce the price of goods, such as batteries and solar panels. Frankly, due to China’s overproduction, it appears that higher tariffs may not curtail Chinese exports too much since they will remain the low-cost producer of many items. As a result, the U.S. will continue to collect more tariff revenue from China.
Overall, market momentum remains strong. Concerns about stocks being expensive have been suspended as the combination of less regulation and a more optimistic consumer have added fuel to normally strong seasonal market trends. Fear of missing out has perhaps never been higher.
