Markets Climb, Volatility Falls

1. The Most Anticipated Week of the Year. The markets typically do not like uncertainty. Last week there were three major events that provided more clarity for markets: the U.S. election outcome, the Federal Reserve monetary policy changes, and China’s level of detail on their latest stimulus efforts. 

Markets have taken a sigh of relief with the U.S. presidential election now in the rear-view mirror. The volatility index (VIX) was hovering above 20 for much of the past two months and was down 25% in the three trading days following the election. In our view, the greatest risk regarding the election was a prolonged period of an unknown outcome, similar to 2000. But with results coming early Wednesday morning, what looks like a potential Republican sweep sent stocks soaring; every sector was green on the week led by consumer discretionary, energy, and industrials all rising over 6%. The S&P 500 closed on Friday up 4.6% for the week and 25% for the year, hitting its 50^th all-time high of 2024 just shy of 6000. We wrote about the market’s response to the election and possible implications following a Trump presidency in last week’s election-focused Market Note and Weekly Wisdom.

Chart 1: The S&P 500 Has Gained 25% year-to-date, as Volatility Falls^[1]

The November FOMC meeting last Thursday was largely uneventful in our view. The Fed cut 25 bp, resulting in a federal funds rate of 4.50-4.75%. Fed Chair Jerome Powell did not provide much insight into the Committee’s December decision and, as always, said they will be attentive to the incoming data. Powell noted that “the Committee judges that the risks to achieving its employment and inflation goals are roughly in balance”, and he was sure to note that the election has no effect on their policy decisions. Looking forward to December, markets are projecting a 65% chance of another 25 bp cut, and a 35% chance for a hold.^[2]

2. China Adds More Stimulus to its Ailing Economy. China announced a $1.4 trillion stimulus package to assist government debt issues, likely with more to come next year. The package will be used to take pressure off the local government’s debt burden and support economic growth. Investors were looking for a more substantial deal, and iShares China Large-Cap ETF (FXI) fell 5.8% on Friday following the announcement. Investors believe it is likely that China will be patient in providing further stimulus until more clarity is provided on President Trump’s plans to place tariffs on Chinese goods.^[3]

3. Fixed Income. U.S. Treasury yields were mixed across the curve last week after volatile moves following the election; the 2-year yield rose 10 bps, the 10-year ended the week flat, and the 30-year fell 4 bps, flattening the curve by 10 bps to +4 on the 2-year/10-year. High yield spreads compressed to +302 and Investment Grade spreads tightened to +113, respectively. U.S. credit ratings deteriorated slightly over the week as the main rating agencies issued 33 downgrades and 31 upgrades. Municipal bond yields followed Treasuries albeit at a slower pace, rising 1 bp across the front end of the curve and 1-5 bp across the long end.

4. The Week Ahead.

Earnings – Tuesday: HD, LYV, MOS, SWKS, TSN; Wednesday: CSCO, OXY; Thursday: AMAT, DIS.

Economics – Tuesday: NFIB Small Business Index; Wednesday: October CPI, Hourly Earnings, Average Workweek; Thursday: Continuing Jobless Claims, Initial Jobless Claims, October PPI; Friday: Export Prices, Import Prices, Retail Sales.

Stephanie Link’s TV Schedule:

Return for Selected Indices^[4]

Sources

^[1] Source: FactSet. As of November 8, 2024.

^[2] Source: CME Group. As of November 8, 2024.

^[3] Source: CNBC. As of November 8, 2024.

^[4] Source: Bloomberg. As of November 11, 2024.

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