Stock Market Outlook AFTER the Election

And the winner is...the stock market.

Donald Trump is the clear winner from Tuesday’s Presidential election and thus we will avoid the unnecessary discord endured during the 2020 cycle.

This is good for the soul...and good for the stock market which hates uncertainty. This explains why the market rallies at the conclusion of the election time after time. This time around market futures are way up this morning, ready to make new highs.

With this obstacle cleared investors can return to a discussion of investment basics like economic data, Fed action and earnings growth.

That will be the focus of our discussion today.

Market Commentary

Let’s take it from the top.

We have a bull market. Why?

The economy is in good shape. Sure, you could pull out a weak economic report here or there, but what really matters is GDP and that wrang up another +2.8% in Q3.

Plus, there is little reason to worry about a recession on the horizon. Goldman Sachs echoed that by recently dropping their recession probability for the next 12 months to only 15%. Note that 10% possibility is the lowest they will apply in their model.

The greater mystery continues to be about the rate of inflation and future Fed actions.

On the one hand we have 5 straight inflation reports that were did not show a decline in inflation. This includes the most recent data from the Fed’s preferred indicator, Core PCE Price Index, which stayed locked at 2.7% year over year.

Then last Friday the Average Hourly Earnings component of the monthly jobs report showed that it remains too sticky at 4.1% year over year. Even worse was the month over month reading coming in at 0.4% when 0.3% was expected.

If the above was the only information in hand, I would say unequivocally that the Fed would not raise rates at the Wednesday November 7th meeting later this afternoon.

On the other hand, only 12,000 jobs were added in October according to that same Friday employment report. That is woefully under the 180,000 expected.

My first instinct is to say it’s another faulty read that gets corrected down the line with a big positive revision. That’s because no other employment indicator is showing this kind of weakness. For example, you would normally see a spike in weekly Jobless Claims leading up to this kind of result. That is not the case.

However, if there is some truth to this softness in employment, then yes, the Fed could very well lower rates another 25 basis points (which is the current consensus). That is because the Fed would need to heed the other half of their dual mandate which is to maintain full employment.

Do remember that there is a 6-12 month lagged effect on Fed rate changes. And the current rates are still restrictive. Thus, to not let unemployment become a bigger problem would compel them to lower rates now.

To be honest, there is very little difference between lowering rates 25 points per meeting or doing it 50 basis points every other meeting. Therefore, I think Fed officials would rather heed the street consensus of lowering by 25 basis points in November instead of holding off on that move which would likely disturb market conditions.

Adding it all up, we are still very much in the midst of a bull market. The key ingredients for the length and strength of the long term bull market has a lot to do with the Fed rate cut decisions acting as a catalyst for increased economic growth which begets higher earnings and higher share prices.

(Last second edition to commentary waking up to Trump election victory.)

Some of Trump’s proposed policies, like high tariffs on China, are considered a bit more inflationary. This is showing up in bond rates leaping higher again this morning with the 10 year Treasury knocking on the door of 4.5% when we were down closer to 3.6% in mid September after the first rate cut.

At this moment no one seems to care as the S&P 500 futures are up over 2%. Even better is the Russell 2000 futures showing small caps are going to have a glorious session (currently +6%).

However, once the high of today’s session wears off more investors will notice bond rates headed in the wrong direction and it may temper how bullish they want to be in the future.

I believe it is best to stay bullish at this time and concentrate our portfolio on the type of positions highlighted in my most recent Zen Investor webinar.

In short, we want to be Risk On. This points to being overweight small and mid caps while underweighting large caps. This is also about a valuation imbalance.

Large caps on average have a forward PE of 22 while small/mid caps are only 15-16. This points to some catch up on the part of these smaller stocks. Most of which typically have a better growth profile than their larger peers which should afford a loftier PE.  

As shared above, the early Wednesday indications point to small and mid caps outperforming nearly 3 to 1 over their large cap peers. That is a welcome sight for market rationality...and a welcome sight for attractive gains in the Zen Investor portfolio.

Plus, we need to focus on more economically sensitive industries that would benefit from a lower rate environment; Industrials, Materials, Auto, Home Building, Finance and Consumer Discretionary.

When the market is surging forward this mix of stocks has served us well. Unfortunately, on the pullbacks this kind of Risk On profile leads to greater losses.

Remember that Zen Investor is focused on the long term. Like what will happen in 2025 and beyond.

The above strategy, and mix of stocks, is right for that situation knowing what we know now about the economy and Fed likely to lower rates. When that outlook changes...so too will our strategy.

For now, I believe we have the correct market outlook and the right blend of stocks including the 3 fresh picks added today.

What To Do Next?

Discover the Zen Investor portfolio filled with my top stocks for the year ahead. 

Each pick goes through our rigorous 4 step screening process to find more 100%+ stock winners. 

And 3 fresh stocks were just added on November 6th packed with tremendous upside potential. 

If you are curious to learn more, and want to see my current top stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

Want to get in touch? Email us at news@wallstreetzen.com.