Bullish Post-Election; But Obstacles Remain

We’ve held a positive outlook on the equity markets leading into the election, and recent developments have only strengthened our conviction. Here’s why we’re optimistic about continued growth in the U.S. Equity market:

• • Strong Earnings Outlook: Corporate earnings for 2024 are solid, and forecasts for the remainder of this year and into 2025 remain robust. This continued profitability signals resilience across industries.
  • Supportive Fed Policy: While the exact timing and extent of interest rate cuts are debatable, the Federal Reserve’s current stance is accommodative. Regardless of whether rate cuts total 25 or 100 basis points, the Fed’s supportive approach is likely to bolster the broader economy.
  • Sustained Fiscal Stimulus: Various legislative measures over the past few years continue to fuel economic activity, creating a favorable environment for businesses and consumers alike.
  • Resilient Job Market: Employment remains strong, providing a stable foundation for economic expansion.
  • Potential Red Sweep: If Republicans secure a majority across branches of government, history suggests a potential for favorable stock market performance in such political climates.
  • Ongoing Buybacks: Companies are expected to maintain or even increase share buybacks, which should support stock prices.
  • The Rise of Artificial Intelligence: We see artificial intelligence playing an increasingly transformative role for many companies over the next three to five years and beyond, creating new efficiencies and competitive advantages.

While no one has a crystal ball, these factors create a compelling case for continued market strength.

However, some headwinds to confront as well. A potentially big headwind could be the nation’s rising deficits and debt. A few weeks ago we discussed the fiscal challenges that either candidate would face if they won the election. It took the bond market about a millisecond to react to the election results as interest rates quickly rose on the expectation that deficits would continue. This is not necessarily a ‘Trump thing’. Both candidates were pursuing policies that would extend our deficit spending and neither was expressing any concern about the debt and deficit. But with the election decided, the bond market is certainly giving the appearance that it is ready to draw a line in the sand.

Why has this become so important now? The simple answer is that from 2016, the U.S. has been in the unusual position of growing deficit spending in concert with a growing economy. The one interlude was the pandemic, which briefly brought the economy to a halt with massive deficit spending quickly pushing the economy forward again. But after a brief respite, the deficit has again been growing, despite continuing economic growth.

The national debt was always viewed as a problem that would eventually come home to roost, but the last eight years have accelerated the pace to that day rather dramatically. Every indication now is that the U.S. debt/deficit will be an issue going forward. So, politicians beware. Your policies are likely to be scrutinized more carefully from here forward.

Investors need to beware as well. Long-term interest rates can stay elevated and, in fact, can become more elevated, if policies do not begin to address the country’s debt problem. Rising interest rates push bond prices down. The bond market is not asking for the debt problem to be resolved in the near term; that is probably an impossible task. However, it appears to be insisting that that the country start to move in the right direction. If the bond market sticks to its guns, that will be a very difficult challenge for the Trump administration.

In this environment, it is our belief that investing in intermediate and long-term bonds is likely to remain unrewarding. Historically, we have used long term Treasury bonds to hedge our equity exposure, but in this environment, that no longer appears feasible.

For that reason, we have chosen to exit our long-term bond positions, except those held purely for income. We are repositioning those assets into hedged equity strategies and in some cases alternative assets, as a bond replacement in portfolios. While this is not classic diversification, our goal is to invest in a way that resembles bond-like returns and volatility, without actually owning bonds. Fundamentally, hedged equities are correlated to equites, but due to the embedded hedging, they have less downside risk, and less upside potential, than unhedged equities. The world is changing, and we are adjusting portfolios to keep pace.

We celebrate our veterans by remembering them on Monday, Veteran’s Day, November 11th.

Have a peaceful week!

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Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that the future performance of any specific investment or investment strategy will be profitable.

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By: Adam