November was eventful for financial markets responding to the election results and the Fed
Uncertainty remains about future policy decisions and economic implications, but market speculation has been fueled by campaign promises and previous Trump initiatives
2024 began with another pessimistic outlook from Wall Street economists, but consumer spending and the labor market slowed at a more gradual pace than expected
November was an eventful month for financial markets, beginning with the election results on the 5th. Once it became clear Republicans would likely win control of both houses of Congress and the White House (“red sweep”), equity markets surged higher in anticipation of looser regulations and low tax rates, amongst other reasons. However, it was an opposite reaction for government bonds. Treasury yields surged higher in anticipation of higher issuance needs to fund a growing fiscal budget deficit. The increase in long-term Treasury yields actually began over a month sooner, when speculation rose in the bond market that such an outcome was possible.
Despite the initial market reaction, the full economic implications of the election remain uncertain, particularly with Republicans holding such a thin majority in Congress. President-elect Trump has emphasized tariffs and immigration as high priorities for his incoming administration. Most economists consider tariffs to be inflationary, but some of these inflationary pressures could perhaps be offset somewhat by greater domestic energy production (i.e., disinflation), as discussed recently by Richmond Fed President Thomas Barkin. The market also assumes the 2017 Tax Cuts & Jobs Act (TCJA) will be fully extended, as well as a potential reduction in the corporate tax rate. In the near-term, such a decision would be expected to reduce government revenues and increase Treasury issuance, assuming no equivalent government spending cuts. However, the devil is in the details, and timing matters. The TCJA does not expire until the end of 2025, so this will likely be a drawn-out negotiation in Congress that could drag on deep into next year. On the immigration front, there are some fears that a significant deportation effort could lead to another sharp imbalance between job openings and available labor, potentially fueling another round of wage inflation.
Speaking of inflation, the Fed’s preferred inflation gauge, core PCE, has trended higher over the last two months. Exhibit 1 tracks the 3-month moving average (annualized) of Core PCE, which has turned higher after back-to-back 0.3% increases in September and October. Will this spark greater caution from Fed leaders regarding the pace of easing in the coming months? On December 2, Fed Governor Waller said he is still leaning toward supporting a December rate, but he also said recent data indicates progress on inflation may be “stalling.” As of December 2, fed funds futures were priced for a little more than a 50% chance of a December rate cut and just three more 25 basis point rate cuts in total through the end of 2025.
Exhibit 1
Source: BEA; Bloomberg; ALM First
A Look Back
December is a good time to reflect on the year that has been, and by the standards of the last four years, 2024 has been relatively tranquil. There has been no pandemic, no large-scale Fed easing or tightening cycle, and no economic calamities. The qualifier “relatively” is key, however, as the year has not been without noise. As Exhibit 2 illustrates, we began the year with a generally pessimistic outlook from the broker/bank economist community. This was not unlike the median economist outlook for 2023 fueled by the expectation the economy couldn’t survive such a swift and sharp rise in the fed funds rate. The median 2025 forecast appears less pessimistic, but we’ll leave the forward-looking discussion to next month’s commentary.
Exhibit 2
Source: Bloomberg
Fixed income performance has been solid in 2024, although higher benchmark yields have weighed somewhat on unhedged total returns for fixed-rate assets. That said, a diversified mix of securities that trade at a spread over Treasuries (MBS, corporate bonds, etc.) have performed very well over the last 12 months thanks to significant spread tightening.
For community banks and credit unions, 2024 was marked by stabilization of financial metrics. Net interest margins (NIM) have steadily risen for the industry, with credit union aggregate NIM now back to pre-COVID levels as of Q3. Profitability metrics ROA and ROE have trended sideways in 2024 for both banks and credit unions with net charge-offs for the industry holding steady throughout the year so far. With marginal funding costs moving lower as the Fed cuts the overnight rate, average cost of funds likely peaked in Q3.
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