Markets Give Solid Early Marks to Trump, but Not as Strong as 2016
The S&P 500 rallied 2.9% last week helped by some positive inflation news (more on that below). The move pushed the index into positive territory for the year, although still 1.6% below the December 6, 2024 all-time high.
Monday was inauguration day, a good moment to check back on what we have seen from markets since election day. We also can compare market performance to 2016, which saw prospects of a similar policy shift to what we have currently.
Before going there, let’s give former President Biden his due. The S&P 500 Index grew at an annualized rate of 13.6% for the four calendar years of his term. That’s not as high as the 16.0% for President Trump’s first term, but it is still well above the historical average. The bond market over Biden’s term in office, however, was awful (for bonds), the Bloomberg US Aggregate Bond Index “growing” at an annual rate of -2.2% over his four years. The good news for savers was in short maturity Treasury returns. The Bloomberg 1-3 Month Treasury Bill Index provided an annual growth rate of 3.0% over Biden’s four years and was over 5% in 2023 and 2024. Those high rates aren’t good for some important areas of the economy, but they do have their upside for savers.
Getting back to our newly inaugurated president, markets have looked differently at the lead-up to Trump’s second term compared his first, but there are a couple of basic things they have in common. First, the S&P 500 has climbed higher. The period from election to inauguration has been a little lower this time around, +4.0% versus +6.6% in 2016 – 2017, but 4.0% in less than three months is still above average.
Second, bond markets haven’t been happy either time. The broad Bloomberg U.S. Aggregate Bond Index is down 0.8% since the election versus down 2.1% last time. The good news there is that bond yields have been rising in part because of higher growth expectations. (That was also true last time.) But inflation concerns are a piece of it too.
In addition to those similarities, there are also some important differences. In 2016 – 2017 Trump’s election was seen as a major boon to smaller businesses and cyclical sectors of the economy leading up to inauguration. The small cap Russell 2000 Index soared post-election in 2016 and the Russell 2000 Value Index was the top style box performer. This election the market has focused more on larger technology-oriented stocks, although mid-cap growth has outperformed large cap growth using Russell indexes. Since that preference has been the primary trend anyway the last couple of years, it’s unlikely that has anything to do with the new occupant of the White House. Better to say the market’s view on technology didn’t change substantially from where it was before the election, but expectations have come down a lot for small caps compared to last time.
On the sector side, following both elections financials performed well, in part because they are potentially the largest beneficiary of deregulation. But, like small caps, investors have shown less interest in cyclical parts of the economy. The industrials sector and materials sector did well post-election in 2016, but have not seen the same lift this time.
The baseline overall takeaway here is positive. Economic expectations over the next year have lifted from where they were pre-election, although we’re likely to get slower real growth than the 3.0% we had over the last eight quarters. More importantly, between rate cuts and the expected policy shift, the perception of downside economic risk has improved.
Finally, a caution. While we do see the current policy environment (including monetary policy) as one that may support the rise of animal spirits and economic confidence as it becomes easier to do business, the policy angle tends to quickly give way to macroeconomic fundamentals. As seen below, much of the policy reaction in 2016 was in the first month, but the picture was quite different over the next 11 months as macroeconomic forces came to dominate. From a market perspective, we are optimistic about the policy environment over the next year, but also see some risk of a policy mistake, whether from the White House, Congress, or the Federal Reserve. We’ve seen market’s reflecting similar concerns in some of the recent mild volatility. But until shown otherwise, we think the policy takeaway for markets will be to the upside.
The Inflation Picture Looks Good
The December consumer price index (CPI) data was released on Wednesday and came in below expectations, with headline CPI rising 0.4% and core CPI (excluding food and energy) rising just 0.2%. This was a big relief for markets, with the S&P 500 rising 1.8% on the release day (January 15, 2025). But let’s dig into the details a bit, as there’s even more good news there.
Headline CPI is up 2.9% across 2024 (year over year), and core CPI is up 3.2%. These numbers are clearly over the Fed’s 2% target. Cue the cries that “inflation is sticky” and that the Fed is erring by cutting rates. This couldn’t be further from the truth.
Let’s focus on where “excess inflation” is coming from for CPI and compare the 2024 data to 2019 (when headline and core CPI were up 2.3% year over year). There are two main drivers of excess inflation: shelter and motor vehicle insurance.
Within shelter, it’s really “owner’s equivalent rent” (OER), which is the “implied rent” homeowners pay, and is based on market rents as opposed to home prices. OER makes up 27% of the headline CPI basket, and a whopping 34% of core CPI. It’s now up 4.9% year over year (y/y), versus 3.3% in December 2019. That’s adding 0.50-%-points to “excess” headline CPI relative to December 2019, and 0.62%-points to “excess” core CPI.
The other component is motor vehicle insurance, which makes up 3% of the CPI basket (and about 4% of core CPI). Motor vehicle insurance is adding 0.32%-points to excess headline CPI and 0.40%-points to excess core CPI (relative to December 2019).
Together, OER and auto insurance fully account for the entirety of excess CPI inflation, both for headline and core. Everything else put together is making a negative contribution.
Another important point here: the December 2019 levels of CPI actually coincided with Personal Consumption Expenditure Index inflation (PCE) and core PCE (the Fed’s preferred metrics) running below their target of 2% — at 1.5% and 1.6% y/y, respectively.
All this is year-over-year data, which is impacted by what happened last year to a degree. But things are looking up when you look at more near-term data.
For one thing, motor vehicle insurance inflation is pulling back in a hurry. Car insurance costs surged in 2023 due to lagged effects of higher car prices post-pandemic (and more car crashes), rising 26% y/y at its peak in August 2023. But the pace has eased to about 11% y/y, and just under 2% annualized over the last three months (through December).
There’s also better news on the docket that is key for the inflation outlook.
Shelter Inflation Has Normalized
Shelter inflation is made up of two components, rents of primary residences and OER. On a year-over-year basis these are still elevated:
- Rents are up 4.3% y/y versus the 2018-2019 average of 3.6%.
- OER is up 4.8% y/y versus the 2018-2019 average of 3.2%.
However, more recent numbers look even better. On a 3-month annualized basis, rents are up 3.2% and OER is up 3.8%.
Shelter inflation is inching ever closer to the pre-pandemic average. And there’s likely more disinflation in the pipeline, as we discussed in our 2025 Outlook. Apartment List reports that median rents are down 0.5% y/y, the 19th straight month with a negative y/y reading.
It’s early days yet but the overall picture we painted in the Outlook still holds. The economy has a lot of strengths going for it, including strong income growth and solid household balance sheets. But there are potential tailwinds from the policy front as well, with the path of monetary policy being key. We do see the Fed as likely to cut 2-3 more times in 2025, as the inflation data moves in a more favorable direction.
In fact, after the December CPI report was released, Fed Governor Chris Waller, who is one of the more influential members on the committee, said that rate cuts are possible in the next few months. He noted that the inflation data so far indicate that their preferred metric, core PCE, will come in at or close to the Fed’s target for the sixth time in the last eight months. And if this continues, it’s “reasonable to think that possibly rate cuts could happen in the first half of the year.” Music to the market’s ears. Now we just need the data to come in favorably, which we believe is likely.
This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
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