How To View Political Headlines
It’s not a surprise that stocks rallied solidly last week following the return of Goldilocks economic data (jobless claims, Philly Fed, flash manufacturing and service PMIs) and as the failed Gaetz nomination gave markets more confidence that Republicans will push back on Trump’s more extreme and unorthodox ideas, policies, etc. Starting with the former, the failed nomination of Gaetz is an important potential positive.
It’s critical to understand that while many in the mainstream and financial media cover Trump through the lens of politics and the culture wars, the market is not political. It doesn’t care about draining swamps, political retribution, woke or anti-woke campaigns or DEI initiatives.The market only cares about policies that 1) Increase (or decrease) earnings and 2) Support growth (or hinder it).Any political movement or agenda that is viewed by the market as getting in the way of better earnings and growth will be viewed as negative and be a headwind on risk assets, regardless of whether those policies are from Republicans or Democrats. This is the way we must view political coverage over the next year (and likely four years) and this will help us cut through the noise and stay focused on the policies that will impact markets, so we can outperform.
To that point, while Republicans control Washington, many of President-elect Trump’s stated policies (most specifically massive tariffs but also possible large deportation initiatives) are not market friendly. Both, if fully executed Trump has discussed, would likely be demonstrably negative for markets as they’d hurt earnings, possibly spike inflation and cause massive uncertainty (which the market hates). I am waiting to see how the Trump administration is going to navigate those negatives as they are certainly aware of the possible negative consequences.
Because markets are not political, they want to see full implementation of all the pro-growth policies (tax cuts/ deregulation) and none of the policies that might interfere with the pro-growth agenda. The failure of the Gaetz nomination gave markets that outcome and implies a sense of gridlock in the Republican party on the more unorthodox policy goals from Trump and that is why stocks rallied last week.
Importantly, this is the opposite of two weeks ago, where the Gaetz, Gabbard, Hegseth and Kennedy nominations made markets fear unorthodox choices by Trump would derail more widely embraced pro-growth policies. Obviously, the political situation will remain in flux in the coming weeks and months and we’re going to see Washington become a source of consistent volatility in 2025.
But if Republicans push back against the more extreme policies/plans from Trump, the potential for a Goldilocks, market-friendly policy regime will increase. While political volatility looms in 2025, the progress from last week does increase the likelihood of a resumption of the post-election rally that turns into a “Santa Rally” into year-end, as long as 1) There are no more unorthodox/chaotic political choices between now and year-end and 2) Economic growth stays Goldilocks. If those two conditions are met, then we should expect a cyclical-led rally into year-end as markets price in that pro-growth agenda in 2025, including outperformance from financials, industrials, energy, consumer discretionary and super-cap tech.
Bottom line, the path of least resistance into year-end remains higher and last week victory for more “traditional” cabinet choices was a market positive, and if that continues and growth stays Goldilocks, then the S&P 500 should trade to, and through, 6,000 into years end.
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