December 2nd, 2024
Tariffs seem to be all anyone can talk about within financial market commentary – so let’s keep the party going.
Economists say, ‘Trump’s overall tariff plans, likely his most consequential economic policy, would push U.S. import duties back up to 1930s levels, stoke inflation, collapse U.S.-China trade, draw retaliation and drastically reorder supply chains.’
If his proposed policy is implemented, this assertion is impossibly difficult to argue against.
Regarding many of Trump’s policies, his political ally Peter Theil has said, “Trump should be taken seriously, but not literally.”
I believe his threat of tariffs are likely just that, a threat, and when/if they materialize they’ll be significantly less drastic than he’s stated them to be.
Trump’s tariffs threats are likely leverage to get what he wants. He’s leveraging the US consumer base, and the greatest economy on the planet, to achieve a more favorable trade policy for US consumers.
That said, if we take him ‘literally’, he recently posted on Truth Social, “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.”
The U.S. accounted for more than 83% of exports from Mexico in 2023 and 75% of Canadian exports.
Trump separately outlined “an additional 10% tariff ” on imports from China. It is not entirely clear what this would mean for China as he has previously pledged to end China’s most-favored-nation trading status and slap tariffs on Chinese imports in excess of 60%.
So what will likely happen?
I, obviously, cannot tell you for sure. But what I can tell you is that Trump will mostly likely follow the stock market. If the market performs poorly, Trump will shift policy. If the market performs well, he will forge forward.
Trump’s proposed policies – deporting 6% of the work force, widespread tariffs, personal and corporate tax cuts, and massive deregulation – are ALL incredibly inflationary. Something must give. And in my opinion, that will likely be tariffs. Time will tell.
And now, your Monthly Market & Economic Update by the numbers.
Warmly,
Mark S Sauer
Market Update
Global Equities: Stocks shrugged off sticky inflation data and moved higher during a holiday-shortened week. Among US large cap indices, the S&P 500 gained 5.39% in November, followed by the Nasdaq up 4.6%, but the big winner was the Dow Jones Industrial Average ended the month 7.26% higher. Value stocks has been outperforming Growth in recent weeks, propelling the Dow Jones Industrial Average to its best monthly performance since November of 2023 and trading intraday above the 45,000 milestone for the first time ever. US small cap stocks continued to show relative strength, gaining another 1.3% in weekly trading and bringing November’s gain to 10.19% for the Russell 2000.
Economic Update
PCE Inflation: The Fed’s preferred inflation measure, the Core Personal Consumption Expenditures Index (PCE), increased from 2.7% annually to 2.8% in October. Until the Fed finds a solution to control shelter costs, readings will continue to be stuck above the 2% target, since shelter is a major contributor to overall inflation. Unfortunately, the uptick in rates is keeping mortgage costs pinned higher and keeping potential new homeowners priced out of the market. The path forward for additional Fed rates will remain uncertain until the market has clarity on the plan for tariffs under the incoming Trump administration, so inflation may remain sticky for – at least – the first quarter of 2025.
Durable Goods Orders: Businesses spent less than expected on equipment in October, unsurprising given the uncertainty surrounding the election and ensuing fiscal policies. Orders for metals, computers, and electronics were weaker than anticipated, resulting in a 0.2% increase, which was below the expected reading of 0.5%. With the election uncertainty now resolved, it is likely that business spending will pick up in the final months of 2024.
Charts of the Month
Index Performance
Our first chart shows the year-to-date performance of the S&P 500 (SPDR S&P 500 ETF, ticker SPY, black line), Developed International Markets (iShares MSCI EAFE ETF, ticker EFA, blue line) and Emerging Markets (iShares MSCI Emerging Markets ETF, ticker EEM, red line). US stocks have outperformed foreign peers since the Global Financial Crisis, widened the gulf during the COVID pandemic, and have now distanced themselves even further this year thanks to a combination of tech dominance and geopolitical turmoil. While there could be a contrarian opportunity brewing with US valuations looking stretched and foreign stocks at dirt-cheap levels, it is hard to bet against the US, given American dominance in cutting edge industries like artificial intelligence, cloud computing, robotics, and more.
Source: AllOneWealth via tradingview.com
Rate Cuts – CME FedWatch Tool
Our next chart exhibits CME Group’s FedWatch tool which shows the market’s expectation for additional rate cuts in December. Investors seem to be reassessing the Fed’s projections for rate cuts, and the Fed appears to be on the same page. It’s possible we will see a December revision to the Fed’s “Dot Plot” Summary of Economic Projections after comments from Fed Chair Jerome Powell that “The economy is not sending any signals that we need to be in a hurry to lower rates.” Former Cleveland Fed President Loretta Mester echoed that sentiment, suggesting fewer rate cuts are on the table in 2025. Mester cited the uncertain implications of proposals for aggressive tariffs and mass deportations on the economy among the reasons for the Fed to pull back on its rate cut glide path. That said, it appears the market still expects one final rate cut in 2024 – with a 64% chance that rates fall an additional 25-basis points.
Source: CME Group FedWatch tool
Personal Income, Spending, & Saving
October’s personal income, spending, and savings data showed positive trends in income and spending heading into the holiday season. Personal income increased more than expected, by 0.6%, while after-tax disposable personal income rose 0.7% for the month. Personal outlays grew by 0.3%, allowing the personal savings rate to edge up to 4.4%, as income growth outpaced spending.
