First comes conditioned reflex, then comes reflection. The market’s rapid risk surge in the wake of decisive election results and excitement about potential growth policies gave way to modest tightening and reassessment last week amid a number of trade-offs and unknowns. In the initial post-election burst, the list of assets rising vertically in the speculative rush is long and active: Bitcoin and related smaller digital tokens, banks and buyout firms, heavily shorted stocks, and retail investors Favorite stocks for upcoming regimes (such as Tesla and Palantir stocks). Goldman Sachs’ basket of the most shorted stocks rose about 10% from Nov. 5 to last Monday, reaching its highest level in two years. Last Tuesday, the ratio of calls to calls soared to its highest level since January 2022. In that moment, aggression triumphed over caution. Still, financial, industrial and consumer cyclical stocks have also taken the lead in a more substantive repricing of growth expectations, adding insult to injury for stocks that have been outperforming for months relatively well. Most speculative stocks went to the bench last week, while large-cap tech stocks continued to struggle for traction, sending the S&P 500 down 2% for the week. On the charts right now, this looks like an orderly pullback in the index with a slight stretch, although it does bring the benchmark back below its Nov. 6 open and back to the pre-election highs set in mid-November 6. October. This retracement did no significant damage to the long-term trend and prevented a more volatile pursuit higher, at least for now. .SPX 1M mountain S&P 500, 1-month S&P remains about 3-4% above levels where chart readers start paying more attention to underlying trends. The Nasdaq 100 gave up its lead in mid-summer and is now back to levels first reached in early July. In both the climb to an all-time high a week ago and the recent pullback, the moves have been rotational rather than single, and if deregulation and tax cut expectations persist, there will be gains from losers in a likely metabolically higher nominal growth environment. The winner will be chosen from the middle. The index rose 10%. Even with the S&P 500 down 1.3% on Friday, only two-thirds of stocks fell on the day, while the equally weighted S&P index also edged down three-quarters of a percentage point. Two-Year Bull Trend Intact As a result, the market is trying to stay sharp on macro strategy, reallocate cyclical risks, and reduce bets on defense and healthcare sectors that may be affected by government spending cuts – while allowing some frothy Stuff cools down on the edge. Even with these policy-tinged moves, the weight of evidence on key market drivers has now been broken down, roughly as if there were no election this month: Stocks have been on a steady upward trend for two years, and remain so. Corporate profit growth has begun to expand. Credit spreads are near their loosest levels this cycle. In an economy with real GDP growth of 2.5%, as economic data unexpectedly rises, Treasury yields rise as well, and continue to do so. Of course, some will argue that Trump’s victory further pushed the 10-year Treasury yield to a four-month high above 4.4%, and the ICE U.S. Dollar Index climbed to the top of its two-year range. It makes sense, even possible, but any effect is more accelerated than change. The yields are largely a reaction to weakening views on how much and how quickly the Fed will cut short-term interest rates to some kind of “neutral” policy. Above-trend GDP performance and a pause in the measured decline in inflation led Fed Chairman Jerome Powell last week to say policymakers were “in no hurry” to cut interest rates further. After a combined 0.75 percentage point rate cuts in September and November, the market is fairly evenly divided on whether another 25 percentage point rate cut will occur within a month. It should be emphasized that the Fed’s ability to take advantage of a solid economy to deliberately normalize interest rates does not in itself have a negative impact on the economy or the stock market. After a much-lauded flawless soft landing in 1995 that saw just three rate cuts in seven months, the Fed kept rates unchanged for more than a year as the economy grew and stocks boomed. Use this as an ideal scenario, if not the most likely scenario, for how this situation would develop. Investors go all-in? Given the somewhat harsh starting point, it makes sense that the market failed to evoke sustained exuberance after election anxiety faded. As noted last week, the bull market is now two years old, valuations have risen, cyclical groups have outperformed, there is little room for further compression in credit spreads, and investors are more optimistic than fearful. The public’s exposure to equities here is considerable, despite what those who point to $7 trillion in money market assets say. Bank of America’s wealth management clients hold 63% in stocks, near the high end of the 20-year range. Of course, this number can continue to rise as the market grows. And other measures of retail investor enthusiasm, such as margin debt balances, don’t come close to dangerous extremes. Still, this goes against many people’s “need” to chase the stock price higher. The initial post-election push higher in small-cap and unprofitable stocks tentatively showed signs of an early-cycle recovery in macro energy and risk appetite. But the broader picture doesn’t quite fit the picture. 3Fourteen Research co-founder Warren Pies took a hard look at whether this shift to riskier stocks justifies it, but he came to the opposite conclusion. More mature economic and risk cycles and smaller, lower-quality stocks are vulnerable to higher interest rates, meaning they are unlikely to lead from here, Pease said. Still, just because this cycle has been rolling for a while doesn’t mean it’s coming to an end, nor does it mean it can’t be given more life through pro-growth policies — or even just the collective hope for such policies. Wall Street Strategists Remain Skeptical When Wall Street strategists continue to target average and median prices below current index levels, it would be unusual to see a corresponding market peak. Watch for sell-side handicap players to start releasing their 2025 outlook to see if the bullish story becomes oversubscribed. It would be a bit strange if risk assets peaked significantly without a flurry of corporate deals and new equity issuances. For some time now, M&A and IPOs have been seriously lagging as a share of both market capitalization and world GDP. There is now a consensus that capital market activity will soon reach a boil. It’s a perfectly reasonable case, but how much has the market already believed it? Here are Goldman Sachs’ price-to-book valuations over the past 20 years, which have surged to post-global financial crisis highs. The last time it was much higher, Goldman Sachs and its peers had few restrictions on balance sheet leverage or proprietary trading and boosted returns on equity to double recent levels. Did the market have the foresight to predict that the unleashed enthusiasm for trading would restore Wall Street middlemen to their former glory? Or could this be another of several recent signs that a narrow sense of nostalgia is taking hold among the masses?
Post-election boost for stocks not sustainable as interest rate and valuation worries resurface | Real Time Headlines
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