Weekly Recap:

by Michael P. Reinking, CFA - Sr. Market Strategist

     Patricia Medina - Market Strategy Analyst

Is the honeymoon over already? Last week equity markets rallied sharply following the definitive Trump win. That rally was partially a relief that there was a quick result removing some of the tail risks but there was also hope that the administration would usher in a more business friendly pro-growth environment. We discussed many of the thematic Trump trades that mirrored the reaction function seen in 2016, despite a very different backdrop. There were clear Trump trade winners, but the gains were broad based as money came off the side lines after some de-risking that had happened heading into the election and hedges were unwound. Thanks to our friends at S&P Global for providing the chart below highlighting the cumulative outflows from the active investment community over the last six months. 

The rally continued early in the week before markets began to consolidate. President Trump has been moving quickly to nominate members to his cabinet. There has been a fair share of controversial choices some of which are firmly viewed as anti-establishment. Earlier this week John Thune, viewed as an “establishment” choice, was voted in at the Senate to replace Mitch McConnell. Some of the Trump nominees could face some pushback in the Senate, sparking more discussion around the use of tool known as recess appointments to avoid these confirmations.  Investors are still awaiting announcements related to key economic positions including Treasury Secretary where it seems like it is a two-man race between Scott Bessent and Howard Lutnick.

As these appointments have been announced this is causing a rethink about the impact on policy, and the winners, or more prominently this week, areas that may be more negatively impacted. For the week many of the major indices gave up about half of last week’s gains. The S&P 500 ended the week down just over 2% pulling back to test its 20d moving average, closing right around the pre-election all-time high and where the index gapped to last Wednesday. Losses in the mid/small cap indices were a little more prominent given the move higher in interest rates. 

Above you likely noted the particular weakness in the ICE Biotech index which was down >10% this week (4.8% today) and healthcare was the worst performing sector this week down >5%. This came in response to the nomination of RFK Jr. as Secretary of HHS.  His nomination weighed particularly hard on pharma companies broadly and particularly those exposed to vaccines. In addition, packaged food companies sold off sharply as did some of the ad agencies with fears that drug adds could be banned.

One of the areas that markets were hopeful about was an improved regulatory environment and on that front financials have been one of the biggest beneficiaries with that theme continuing to play out this week. However, that backdrop may not be the case for the mega-cap tech stocks depending on who is appointed to head the FTC (see FT article) which caused particular weakness in info tech and communication services (META/GOOGL) over the last two days. Within tech semiconductors were particularly weak following a couple of disappointing earnings announcements including Applied Materials overnight. Nvidia earnings will be a big catalyst next week. The ICE Semiconductor index was down nearly 9%.

Another set of appointments that impacted markets this week were Elon Musk and Vivek Ramaswamy to head up the Department of Government Efficiency, or DOGE, aptly named for its leader. Despite the fact that it is unclear that this agency can actually drive change this began to impact companies exposed to government revenues particularly defense/civil engineering contractors which got hit hard. Some of the defense names were also under pressure on expectations that Trump will be able to quickly end the conflict in Ukraine.

Despite oil pulling back energy held up closing modestly higher driven by strength in natural gas, pipeline and refining companies.

Global markets - mostly closed lower but there was definitely some regional differentiation.

Commodities - it was a rough week for commodities across the board ex-natural gas which seemed to be up primarily related to weather. The USD strength, China concerns and some crowded positioning adding to the weakness. 

Economic data and monetary policy have been the primary macro drivers for markets over the last couple of years however, at least for the time being this is taking a back seat to Washington and future policy. That being said, this week’s data continued to point to a resilient labor market and consumer. The inflation data came in slightly hotter than expected raising some concerns about the disinflationary process stalling out and the prospect for fewer rate cuts.

Highlights of that data:

NY Fed Quarterly Report on Household Debt and Credit. Total balances increased by 0.8% in the quarter to $17.94T. In terms of delinquencies 3.5% of outstanding debt was in some stage of delinquency up from 3.2%. Within credit cards the data was mixed with the percentage of balances transitioning to delinquency moderating to 8.8% from 9.1% but the percentage of loans moving into 90+ days continuing to move higher.

Fed officials were out in force this week and overall, the commentary leaned to the hawkish side of things but really this is just catching up with where markets have already been moving. Collectively the group talked about the resilient backdrop and talked about the difficult balancing act and risks of not cutting quickly enough and impacting growth or cutting too quickly adding to inflationary pressures. Uniformly, officials have said that it is too early to make a decision about whether or not to cut in December waiting on additional data. Yesterday, Fed Chair Powell said with the current backdrop there is no need for the Fed to move quickly leaving the prospect of skipping the December meeting on the table. From my perspective the November jobs report will be the determinant factor as to whether the Fed cuts next month.

As we’ve pointed out over the last year the meeting-by-meeting decision isn’t the real important point it is the destination. Markets have been repricing suggesting there will be fewer rate cuts than previously expected or projected within the Fed’s previous Summary of Economic projections with the market now projection rates at the end of 2025 just below 4% while the last SEP had a projection of 3.4%. However, to highlight how quickly sentiment has been shifting, ahead of that meeting markets were looking for something closer to 3% .

The real question is where the neutral rate is, which is the theoretical rate that neither that neither slows or accelerates the economy. This has been a big topic mentioned throughout the week with the most notable commentary from Dallas Fed President Lorie Logan who highlighted by some measures the Fed Fund rate is not far from neutral which is why she suggests a cautious approach to further easing.

Yields moved higher this week, but this happened primarily in the long end of the curve with the 2yr up ~5bps while 10/30yr yields are up ~15bps hovering right around the post-election highs. 

After some consolidation to start the week there was some downside momentum in the back half with today's options expiration potentially adding to that move. The index pulled back to test previous highs and the 20d ma which is about a 50% retracement of the post election rally which is around the area where you'd like to see some stabilization. If the index were to fill the gap and test its 50d ma there is another ~2% of downside. Some backing and filling is not a bad thing after the move higher. If the 50d breaks 5,700 will be a key support.  

Last week

Ahead of the election the S&P 500 pulled back into the first level of support we highlighted ~5,700 coinciding with the area we broke out from in September and the 50d ma. That level held and the index gapped just over the all-time high on Wednesday and has extended higher since. It is now pretty close to the technical target we discussed in the beginning of September as the index was carving out the small inverse head and shoulders pattern. From here we’ll want to see some commitment to the strength. Some sideways action allowing moving averages to catch up to price would be positive. 

We're in the process of shifting from the tide lifts all boats to trying to pick winners and losers. I'd expect the volatility to continue as the administration takes shape but there are a lot of moving pieces getting from here to the ultimate implementation of policy. Last week markets were in the honey moon phase focusing only on positive implications of the election. This week it feels like there may has been an over reaction to some of the headlines. This was something markets had to adjust to back in 2016 as well.

Washington is going to remain the focal point next week. The economic calendar is a bit lighter. Global inflation data and S&P global flash PMIs are the highlights. I'd expect central bankers to continue to chime in and the PBOC has a rate decision on Wednesday. The G20 Leader's Summit begins on Monday in Brazil. Earnings will move back under the spot light with the key retail and tech earnings including Walmart and Nvidia. Have a great weekend! 

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