Lexicon Financial Group Weekly Update — November 06, 2024

Nov 6

“The most successful politician is he who says what the people are thinking most often in the loudest voice.”

— Theodore Roosevelt Jr., 26th President of the United States

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

Looking Around

The 2024 elections in the United States (U.S.) are done and dusted. Donald Trump won the presidential election convincingly and is set to become the 47th President of U.S. The Republican Party has gained control of the Senate while control of the congress is still too close to call.

Elections can and do impact equity markets because markets hate uncertainty. A clear margin of victory, however, tends to reduce uncertainty and minimise market volatility. That doesn’t mean that uncertainty can’t rear again later, but for the moment, major U.S. (and global) markets have rallied upwards.

*Source: LSEG Data & Analytics. By The New York Times*

This was a tide that lifted all boats as even cryptocurrency enjoyed a boom – bitcoin rose to a new height – Trump made a promise to make the U.S. the “crypto capital of the planet” during the campaign. To be honest, we are not exactly sure what that means, since cryptocurrency has been designed to be decentralised so it can’t be controlled by government, but we digress.

Some have referred to this rally as the “Trump bump,” but truthfully, stock markets may likely have reacted favourably regardless of who won.

In 2016, after Trump’s first victory, markets reacted with a broad sell-off before rebounding the next day to end somewhat higher. We may see something similar play out here, where we have an initial knee-jerk reaction and then, as investors come off their high (or their low) of Trump being elected, and things kind of moderate over thereafter. Currently, markets are basically reacting to perceptions of the incoming administration’s “pro-growth agenda,” which could change in coming days, as new commentary or information arises. Patience is the path when markets are faced with a historical event like a U.S. election, so it is best to abide by a 24-hour or even three-day rule to wait and see where things are going to land.

The economic platform Trump ran on in this campaign was focused largely on America-first policies such as blanket tariffs that many economists warned could drive inflation higher globally. However, as we all know, a politician may say one thing during a campaign but implement a policy that may not unfold in the same way. Until the Trump administration tables legislation or finalises policy plans, it’s impossible to know how those plans will impact market sectors or specific companies for that matter. One way to deal with market fluctuations in the wake of the U.S. election is to take little or no action. When markets are faced with a historical event like a U.S. election, it is wise to wait and see where things are going to land. (1)

Recently, retirement planning firm Teachers Insurance and Annuity Association of America (TIAA) considered how a moderate-risk portfolio with 60 per cent stocks and 40 per cent bonds fared across all presidential election years since 1928. There were only four years that had negative returns: 1932 (down 1.4 per cent); 1940 (down 4.7 per cent); 2000 (down 0.8 per cent); and 2008 (down 20.1 per cent). It should be noted that all of these presidential election years occurred at the same time as major events: The Great Depression, World War II, the implosion of the tech bubble, and the housing and financial crisis that resulted in the Great Recession.

Over time, however, these negative returns didn’t move the needle in terms of long-term average performance. The TIAA actually found that a 60/40 portfolio had an average annual return of 8.7 per cent across the 24 presidential election years since 1928. This is just a hair above the 8.5 per cent average for the same portfolio during all non-election years over that same period. So, it appears that over a very long period of time, it is a wash. (2)

All of this proves one thing… have an investment strategy and stick to it. Our goal is to guide and help you to do this in line with your investment needs and objectives. And we are always just an email or call away.

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

Video: How will a second Trump presidency affect Canada?

Trump’s in. Here’s what it means for Europe.

China's markets drop as Trump presidency looms

Raymond James Markets & Investing: The 2024 Election is (mostly) over - what can we expect going forward? – CIO Larry Adam, November 6, 2024

Raymond James Economy & Policy: Oh, no, a three-handed economist - Chief Economist Eugenio Alemán, November 1, 2024

Looking Back

Major equity markets in the U.S. ended down last week and the Toronto Stock Exchange’s S&P/TSX composite index (TSX) followed suit, despite being up almost 100 points on Friday. This was due to energy and interest-rate sensitive stocks losing ground and investors taking some profits before Tuesday’s U.S. presidential election. (3)

Growth stocks generally lagged value stocks, due partly to cautious earnings reports from Facebook parent Meta Platforms and software giant Microsoft. Small-caps also held up much better than large-caps. Last week also delivered several closely watched economic reports. On Tuesday last week, the Labor Department reported that the number of job openings had fallen to 7.44 million in September – the lowest level since January 2021. The number of Americans leaving jobs remained relatively unchanged, however, with the number of those quitting voluntarily—seen by some as a better measure of labour market conditions—also staying more or less steady.

Last Friday, however, the Labor Department reported that, overall, nonfarm payrolls were “essentially unchanged” over the month, with employers adding only 12,000 jobs—the lowest number since December 2020. The department noted that the impact reflected a decline of 44,000 jobs in transport equipment manufacturing activity due to the Boeing strike, while little or no growth in employment in other major industries failed to compensate for the weakness. Furthermore, the yield on the benchmark 10-year U.S. Treasury note moved to another four-month intraday high (4.37 per cent) on Friday, perhaps in response to expectations for an eventual renewal of inflation and growth pressures.

Major European equity markets ended last week down, thanks to concerns about the potential for escalating conflict in the Middle East, some poor corporate results, and moderating expectations for the European Central Bank’s (ECB’s) interest rate cuts. There was some good news as the eurozone economy expanded in the third quarter by 0.4 per cent, which is double its second-quarter growth rate and exceeded a consensus estimate of 0.2 per cent. Germany unexpectedly avoided a recession, growing 0.2 per cent. France and Spain also reported stronger-than-expected economic growth. However, Italy’s economy stalled.

Meanwhile, annual headline inflation accelerated slightly faster than forecast to 2 per cent in October from 1.7 per cent in September, as the decline in energy prices last year dropped out of the annual comparison. Core inflation — which excludes prices for energy, food, alcohol, and tobacco — was unchanged at 2.7 per cent.

All the major markets in Europe ended down last week. Business activity in the euro area remained in contractionary territory in October. An early estimate of the composite Purchasing Managers’ Index (PMI), which combines activity in the manufacturing and services sectors, registered 49.7 in October, compared with 49.6 in September. PMI readings less than 50 indicate a contraction. France and Germany, the two largest economies, were the main sources of weakness. A number of European Central Bank (ECB) policymakers (including former hawks) raised the possibility of more interest rate cuts before the end of the year, but they seemed to be divided over the pace of rate cuts.

Unlike the week before, Japan’s stock markets rose and ended up last week as the Bank of Japan (BoJ) held rates steady amid political uncertainty.

Chinese equity markets retreated last week. This, despite data showing a pickup in economic activity. Factory activity in China expanded, for the first time since April, amid better demand. The official manufacturing purchasing managers’ index (PMI) rose to an above-consensus 50.1 in October from 49.8 in September, according to the China’s statistics office. The non-manufacturing PMI, which measures construction and services activity, increased to a lower-than-expected 50.2 in October from 50 in September. The rise in services activity was partly attributed to increased spending during the country’s Golden Week holiday. Separately, the private Caixin/S&P Global survey of manufacturing activity rose to 50.3 in October from the prior month’s 49.3 amid new order growth.

In the real estate sector, the value of new home sales by the country’s top 100 developers rose 7.1 per cent from a year ago after September’s 37.7 per cent drop. This marks the first year-on-year growth in 2024, according to the China Real Estate Information Corp. Taken together, the first batch of major economic indicators after the rollout of Beijing’s broad stimulus package indicated early signs of recovery in the Chinese economy. (4)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.