Why Did Stocks Drop Last Week?
Stocks declined solidly last week thanks to two main reasons: Slightly “Too Hot” economic data that pushed back against the expectation for a December rate cut and as President-elect Trump, via some of his cabinet nominations, reminded investors of the general chaos and constant distractions that occurred during his first term.
Starting with Trump, some of his cabinet appointments were met with surprise and, in some cases, shock. The market’s reaction to the cabinet appointments, in aggregate, was negative, but that’s not because the market doesn’t necessarily think the people being appointed are “bad.” The market won’t take an opinion on that until these officials are installed and begin to execute policy.
Instead, markets reacted negatively because some of Trump’s selections are controversial enough that they risk destroying, after just one week, the type of unity in the Republican party that’s needed to execute the progrowth agenda that markets embraced in the days following the election.
Put more bluntly, some of the choices have injected seemingly needless chaos into nomination process, and risk alienating some Republican Senators and/or House members, while the actual nomination of House Representatives will shrink an already barely workable Republican majority in the House.
These decisions have real consequences from a policy standpoint, as we saw back in 2017 when Republican Senators blocked a repeal of the Affordable Care Act and forced the Tax Cuts and Jobs Act to be a scaled down version of what was initially desired. We’ll all see how the confirmation process plays out, but last week’s nominations reminded the markets of the consistent drama and chaos and accompanied policy during the first Trump administration and at 6,000 in the S&P 500, the market is simply not priced for anything other political calm and pro-growth policies. We may get pro-growth policies, but last week was a shot across the bow that we likely won’t get political calm.
Turning to the other negative influence on stocks last week, the bottom line is economic data was too good and Fed officials, just one week after seeming to remain committed to a December rate cut, hedged a bit and that cut is now somewhat in doubt. And beyond just the one cut, the idea the Fed may pause the rate-cutting cycle, after just 75 bps, is growing and if that actually happens (and it’s a long way from happening but chances rose last week) then that will undermine one of the stronger supports for this market.
So, did last week’s negative events (reminder of political chaos and too hot data) change the outlook for a year-end rally? No, not really. While there were incremental negatives last week, the general set up for markets between now and year-end remains positive because growth is still solid, the Fed is still expected to cut in December and the political surprises aren’t enough to offset expected pro-growth policies.
So, the events of last week are not enough to turn the outlook for stocks in the near term (or medium term) more negative. They are, however, a reminder that the S&P 500 near 6,000 is priced for perfection, and perfection means: Goldilocks growth, ongoing Fed rate cutting cycle, falling inflation and pro-growth policies that aren't derailed or unduly delayed by political chaos and drama.
Until something materially changes (and unorthodox cabinet picks are not a material change) then allocation to sectors that benefit from pro-growth policies remains the right way to position.
Finally, last week is a solid reminder to all of us that while the ultimate policy direction should be positive for stocks (pro-growth) the path to get to that destination could be a bumpy one given President-elect Trump’s penchant for drama and chaos, and that’s something to keep in mind as we look ahead to 2025.
It’s safe to say it will be a more volatile year than 2024.
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