For those of you who would prefer to listen:
The post-election rally stalled this week. The Dow and S&P erased half of their gains since Election Day. A better-than-expected earnings report from Disney helped cushion the Dow, while the Tech-heavy NAS fared the worst on the week. The Market continues to deal with the fits and startsin the wake of the election. It’s trying to decipher the differences of campaign promises versus actual governing priorities. There have been some cabinet appointments that, shall I say, have raised some eyebrows as well as caused full-blown shock. That shock included members from within the Republican Party.
The proposed Trump policies, in aggregate, have exacerbated the bond vigilantes with scrutiny on ballooning debt and deficits. Tariffs and an immigration crackdown were specifically flagged as potential drags on growth and triggers for more inflation. The Dollar strength is another overhang. Makes it more difficult to cut trade deficits.
De-regulation is a priority for the Trump team, which has been a big driver for the Stock Market response. More deals and less restrictions are generally good for Financials, Industrials and Energy, not to mention Tech. An increase of liquified natural gas (LNG) exports would be a boon for American Energy and help narrow the spread of trade deficits. Europe and Japan need what we have. Natural Gas is cheap in the United States, with an abundant supply. The price of gas is $3 here. The Japanese currently pay $13 over there.
There were a slew of cabinet nominees that made headlines this week. It started with Susie Wiles being named Chief of Staff. This, from one of our Washington sources:
“Not only do we view Ms. Wiles as experienced and competent, but she has also had a lobbying career during which she has represented businesses. While a Trump loyalist, she strikes us as more mainstream than populist and will, at very least, enable voices other than populist voices to be heard within the White House. We view this as a positive sign.”
I was on a call with one of our Washington sources Friday, trying to map out what might lie ahead. He emphasized that Donald Trump likes surprises. “He’s an entertainer at heart. Reality TV stars don’t tend to stick to a script”. That sure is evident. He suggested that Trump was likely offering up sacrificial lambs to enhance the chances of the candidates he really wants to get confirmed. Matt Gaetz is the obvious example. “It’s fair to say, Gaetz faces an uphill climb in securing Senate GOP confirmation for AG (Attorney General)”. RFK for Health & Human Services is another. The thinking is, with a couple of perceived bad choices, the others will look less bad, which might make it easier to get them confirmed. As a reminder, many of Trump’s Republican critics have left the House and Senate. Those “Never Trump” Republicans are nearly extinct in Washington.
Robert Lighthizer is a prominent figure in the Trump orbit. He was Trump’s trade czar in his first administration. There’s talk of him becoming the Secretary of Commerce or even Treasury. Lighthizer reportedly speaks to Trump regularly on trade and has been working for months to hone not only his campaign rhetoric on tariffs, but also policy planning behind the scenes. If Robert Lighthizer has influence in the Oval Office come January, it would likely expedite tariffs. Lighthizer is a China Hawk. He would likely partner well with a Secretary of State Marco Rubio, who is a China Hawk too.
Tariffs have been an issue this Earnings Season. Managements have mentioned the issue and risk on the conference calls with increased frequency. Companies are scrambling to shift production out of China, as they brace for tariff hikes from the second Trump administration. Chinese stocks have taken a beating since the election. But it could’ve been worse. Some senior Chinese officials have reportedly said that Beijing is relieved, at least for now, with the appointments. Perhaps they think Trump’s China Hawks are not as Hawkish as they expected. I guess that means they’re celebrating that Peter Navarro has not been tapped for a job.
Elon Musk’s star has definitely risen in Washington. He will team up with former Biotech entrepreneur and Presidential candidate Vivek Ramaswamy to lead the new Department of Government Efficiency. They claim to target eliminating $2 Trillion in Federal waste. But Musk will not be part of the government. It’s not exactly clear how this will work, with seeming potential conflicts of interest. The role has been described to be more like the Simpson-Bowles commission from a decade ago. You may recall, that was a bipartisan commission charged with developing policies for fiscal discipline and deficit reduction. It was a consultation role. The Market definitely likes the prospects of less spending in Washington. However, the Bond Market is indicating that spending cuts won’t be that easy.
The CHIPs Act looks safe. This according to our sources. The Trump administration is likely to increase the efforts of restoring American semiconductor manufacturing and supply chains. Made in America is a bipartisan theme.
“Make America Healthy Again”. That has become a new motto for the new White House. The author is Robert F. Kennedy Jr., who has been selected to lead the Department of Health and Human Services. Importantly, Kennedy is a Big Pharma skeptic and has promised to “end the corruption at the federal agencies.” Healthcare stocks got hammered with this announcement. If approved, RFK’s first priority would be to declare a national emergency over the “chronic disease epidemic.” That includes conditions like obesity, diabetes and autism, as well as reducing chemicals, additives and processed ingredients in food. Our Washington sources believe RFK Jr. is a long shot to get approved for this important role.
Inflation picked up a bit, but that was expected. OctoberCPI (Consumer Price Index) grew 0.2% on the month and at a 2.6% rate compared to last year. Shelter was the primary driver, accelerating to 0.4% from 0.2%, Shelter alone accounted for half of the total increase. The core CPI, which strips out food and energy costs, increased 0.3% and a 3.3% annual run rate. It’s back on the rise from the Summer low.
Airline fares jumped 3.2% in October. That was the same as last month, while car insurance ticked 0.1% lower after September’s 1.2% rise. Apparel fell 1.5% month-over-month, giving up September’s 1.1% increase. Interest rates have gone back up too. Mortgage rates have done nothing but go up since the Fed cut rates in September. 30-Year fixed loans are over 7% again. Expensive money buys a lot less house. It’s a nagging stress for wannabe home buyers.
Fed Chair Powell indicated a pause in the rate cut campaign is likely in December. He said the Economy is not sending signals that the Fed needs to be in a hurry to lower interest rates. That sent yields even higher, which drive interest rates. The Market lowered the odds of December rate cut to 60% following Powell’s remarks. It was an 85% probability a month ago.
The American Consumer keeps spending. October retail sales came in higher than expected. September was revised up too. Car sales were a source of strength. Electronics and appliance sales were strong too. Consumers definitely keep spending. But what they’re buying is getting more selective. We shall see how this shapes up with the Holidays ahead.
Back to the Market:
A strong Holiday should keep a solid bid for stocks. The corrective price action this week was healthy as things got a little excessive with the gains last week. The weakness in Healthcare has our attention. It seems to be a clear target with the new Trump regime. But we are finding intriguing value in Energy, Industrials and Financials. Of course, this AI renaissance is real. American innovation is required for global leadership in the Digital Age. The Tech rally needed a breather. The sell-off is burning off the excesses. The weakness looks buyable. Patience is generally rewarded.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
