Speaker 1 (00:05):
Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Now, every week we are here to keep you up to date on the key trends and events driving global markets. We are recording after the Fed's rate decision on Thursday evening, and here are this week's market storylines. Now the headliner this week is no surprise with the election on Tuesday. As we've discussed, this has been an overhang on equity markets for some time. The catalyst was a known unknown with the investment community positioning and preparing for months. Now, the conventional wisdom was that there would be a wave of volatility as the election approach and within equity markets that never really played out. We had suggested that the pain trade for the professional investment community would be a continued move to the upside that never gave people the opportunity to get in.
Speaker 1 (00:55):
Now, after breaking out in the middle of September, the s and p 500 had rallied throughout most of October bucking historical seasonal trends ahead of elections. That is until Halloween with the nearly 2% decline that left the index slightly lower for the month, but it was still trading just below all time highs as voters went to the polls. Now, by most accounts, this election was setting up to be a very close race with a handful of swing states expected to determine the outcome and when the month heading in event contracts and financial markets began to price in the prospect of a Trump presidency. But probabilities were only slightly better than a coin flip. Now, on election night, financial markets once again sniffed out the outcome early as votes were being counted with futures beginning to rally around seven in the evening. Now, president Trump exceeded most expectations, not only securing the electoral vote, but also winning the popular vote as well.
Speaker 1 (01:48):
The outcome was decisive, removing the tail risk associated with the long drawn out process. Now, Republicans also performed well down ballot securing the Senate and most likely the house as well. Now, this was a clearing event for the market, removing some uncertainty, but most importantly, some of the tail risk scenarios. There was a risk on response with equity markets moving sharply higher. The prospect for a more business friendly environment with lower taxes and a less onerous regulatory backdrop sent the s and p 500 up over 2.5%, the single biggest post-election gain since the creation of the index. Now, cyclical sectors led to the upside while defensive and yield oriented sectors moved lower. Now, the biggest outperformers on Wednesday were the small and mid-cap stocks with the Russell 2000 closing up around 6%. Now, this was particularly impressive as treasury yields moved sharply higher, which is partially related to the fact that these companies are more domestically oriented.
Speaker 1 (02:47):
The makeup of the index also played a factor with financials and industrials accounting. For about 35% of the market capitalization, a much higher percent than the s and p 500 and the regional banks, which was the best performing SEC group of stocks, was up over 10% on the day. Now, the Trump trade baskets directionally traded as expected. The US dollar and Bitcoin both rallied and thematically within equity markets. We already discussed financials industrials, but on the downside, we saw retailers that rely upon imports. Underperforming healthcare was a little more mixed with some expectations for changes to the A CA while green energy and renewable stocks broadly traded lower. The second big storyline this week was the fed's rate decision this afternoon. Now, however, unlike the September meeting, there wasn't much drama with Central Bank widely expected to cut rates by 25 basis points, and they delivered just that.
Speaker 1 (03:45):
There were only minor tweaks to the statement while Chair Powell's commentary was very consistent with what we heard. In September, the chairman pointed to progress on inflation once again highlighting housing related components, keeping levels elevated, and in terms of the labor market. He seemingly downplayed the weakness in the most recent jobs report due to the impact of storms and strikes and continued to say the economy is in a good place now. He did his best not to provide any forward guidance maintaining optionality and pointing to data dependence. This makes a lot of sense given how much flux there is with potential Washington policy changes. Now, he did say that the election had no impact on current monetary policy decisions and that until proposals became more concrete, they wouldn't be incorporated into forecast. Now, he did downplay the recent move higher in treasury yields saying, we'll have to see how long that lasts.
Speaker 1 (04:39):
And when asked to parse what was pushing them higher, he suggested it was happening more as a reflection of stronger growth and less downside risks as opposed to higher inflation expectations or concerns about fiscal deficits. Now, on that front, he once again reiterated that fiscal policy is on an unsustainable path, but noted that current levels of debt were not unsustainable. Now this is one of the major issues that markets and President Trump will need to address in the coming years. All in all, it was a pretty boring fed meeting, which is exactly what I think the committee wanted, and after a long couple of days, traders were okay with that too. Now, yields in the US dollar index both pulled back throughout today's session, giving back a good portion of yesterday's move higher. However, the strength and equity markets was impressive with the s and p 500 continuing to move modestly to the upside, approaching the 6,000 threshold.
Speaker 1 (05:33):
Though today's leadership did flip cyclical sectors and small and mid cap stocks pulled back slightly while the defensive and yield oriented sectors that lagged yesterday bounced. Now mega cap tech stocks also outperformed playing some catch up today with the NYCF plus index up over 2%, hitting a new all time high for the first time since mid-July, and the commitment to strength today was positive. Now, last week, heading into the potential volatility, I highlighted the supportive backdrop with a resilient economy monetary policy moving in the right direction, and corporate America well positioned for the future. Just as the election was an overhang for markets, it was also an overhang for the economy. And there there's a good chance that we start to see a pickup in activity and improvement in survey data in the coming months. From an equity market perspective, the unwinding of hedges and cash coming off the sidelines has been partially behind the strength, but from here, seasonal tailwinds kicked in kick in as well with November and December, particularly strong during election years, and companies are now starting to come out of their buyback blackout windows, which should help to put a bid beneath the market during pullbacks.
Speaker 1 (06:43):
Now looking ahead to next week, the focus will shift back to economic data with CPI on Wednesday and retail sales on Friday. Now, earnings will start to slow down next week until we start to hear from some of the major retailers in the following week. There are a couple of important releases including Home Depot, Cisco, and Disney. Now, China will also remain in focus with expectations building for an announcement of a bigger stimulus package at the conclusion of the National People's Congress, which ends this evening. Now, in the coming week, markets will continue to be focused on Washington as President Trump begins to assemble his cabinet. Now, once again, thank you for spending some time with us today. Remember, you can watch market storylines on tv.nyc.com or on NYC YouTube channel, or you can listen every Friday on the inside the Ice House Podcast feed. Thanks for joining me. I'm Michael Reinking. I'll talk to you again next week.
Speaker 2 (07:37):
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