In the leadup to the election, we wrote that “once the outcome is known, the market is likely to rally in our view”. Indeed, since election night the S&P 500 has advanced 4.1% through 11/26 according to Morningstar. Absent the uncertainty of an impending election, volatility has subsided, and buyers have come off the sidelines. The gains have been broad based as mid and small cap companies have outperformed their large cap counterparts. Big picture indicators continue to show that the market is on healthy footing, and that the path of least resistance is higher.
There have been elements of selectivity in recent weeks, as industry groups related to gold, pharmaceuticals, and renewable energy have declined while banks and industrials have rallied more than 10% (according to data from Stockcharts). Our process has successfully tilted accounts away from areas of weakness and towards areas of strength over the past month, particularly in mid and small cap companies. Our indicators continue to show that this area of the market is poised for future strong performance, which is also a positive sign for the market as a whole.
The most common fear we have heard from clients about the incoming administration is the potential negative effects of tariffs on the market. We think this is not something that should deter long term investors. First of all, 70% of the US economy is services and thus not directly affected by tariffs. An Evercore analysis found that if all of Trump’s proposed tariffs were implemented, it would reduce GDP by 0.4%. That is not enough to make a significant impact on the stock market in our view. Secondly, we have evidence from recent history. The market performed extremely well for most of 2018 and 2019 as the trade war with China intensified. Importantly, the Biden administration kept all of those tariffs in place and announced new tariffs against China in May of this year. That did not preclude the stock market from a strong 2024. Lastly, we have taken care, where possible, to invest in companies that are not in the crosshairs of a potential trade war. Mid and small cap companies, mentioned above, tend to be more domestically oriented.
Of course, we should expect periods of volatility at some point in the coming year. Our process strives to differentiate between temporary declines and those that are the start of something bigger. As of today, our process strongly suggests that the market is likely to continue higher, thus investors should weather any temporary declines. As always, we will adapt portfolios as our objective indicators evolve.
