NEWS
What Happened Last Week
Donald Trump was elected to the Presidency for his second term.
The DOW Jones rose 3.6% on Wednesday, registering the highest post-election-day result since 1896.
The Fed cut interest rates by 25 basis points (0.25%) to 4.50%-4.75%.
Long bond yields rose after the election, betting on continued inflation.
Services Purchasing Managers Index (PMI) registered the highest level since July 2022, coming in at 56 (50+ indicates likely future expansion).
Consumer spending rose 3.7% in Q3, the most since early 2023, mainly due to rising incomes and continued low average unemployment.
Investor sentiment improved toward optimism after bordering on fear the prior week, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
Presidential elections can cause emotions to run high.
We follow the story of our favorite candidate for months, becoming enthralled with their story and jumping on board with their vision for the future. And we become emotionally connected with them.
So depending on whose story we were following, we either feel exuberant or devastated following the election results.
Unlike us, markets are neutral when it comes to political parties, thank goodness! But they very commonly rise after an election. Why? Because the future becomes just a bit clearer as uncertainty fades away.
Three things drive stock markets: economics, sentiment and politics.
Right now, the economics look reasonably strong. So strong, in fact, that some fear Trump’s tax cuts could boost growth to the point of reaccelerating inflation. That along with the proposed tariffs.
But here’s the thing. The idea that strong economic growth drives materially higher inflation is mostly a myth. As Milton Friedman proved long ago, inflation is simply a monetary phenomenon: too much money chasing too few goods. It is largely dependent on the rate of increase in money supply.
Economic growth and rising wages have a much smaller effect on inflation than many assume. Supply chain disruptions and accelerated money creation tend to be the main culprits. Remember that the economy continued to grow while wages rose from 2022-2024, all the while inflation fell steadily from its peak in June 2022.
Wage growth usually follows inflation, not the other way around.
And tariffs don’t have quite the impact that people think they do on inflation, either. Consider the tariffs placed on China in Trump’s last Presidency. Much of the rise in costs is eaten by the business while they determine other ways to source products and parts, doing everything possible to not pass on the price increase to consumers.
But these ideas still grip the minds of most investors, which means it keeps markets cautious. That’s a good thing! That’s how markets grow.
And remember that, as much attention is given to the Presidential election, a President’s powers are limited and balanced by the two other branches of government. This is not a one-man show, as much as the legacy media wants to instill that illusion.
Normally, markets don’t particularly like one party dominating both houses of Congress and the Presidency. But the reason is due to uncertainty in regulatory changes.
Trump ran on the plan of cutting regulation, not increasing it. So the reaction of markets to a Republican Congress is difficult to predict, though it’s not likely to cause any more than temporary volatility while the new rhythm comes into clearer focus.