Post-Election Market: A Measured Reassessment After Initial Euphoria

The decisive election results sparked an immediate surge in market activity, fueled by anticipation of growth-stimulating policies. Assets ranging from Bitcoin to heavily shorted stocks experienced a rapid increase in value. However, this initial exuberance quickly gave way to a more cautious reassessment as investors considered potential trade-offs and uncertainties. While some sectors continued their upward trajectory, others experienced a pullback, leading to a more nuanced market landscape where discerning investment strategies are necessary.

Key Takeaways:

• Initial Post-Election Surge: A wave of speculative investment pushed up assets like Bitcoin, shorted stocks (including Tesla and Palantir), and bank stocks.
• Subsequent Retrenchment: A period of reassessment followed, with some speculative plays cooling off, while mega-cap tech continued to underperform, pulling the S&P 500 down.
• Shift in Investment Focus: Investors are reallocating assets toward cyclical sectors and away from those potentially impacted by government spending cuts.
• Long-Term Trend Remains Intact: The overall two-year bull market trend remains largely intact, although valuations remain elevated.
• The Fed’s Role: The Federal Reserve’s measured approach to rate cuts, influenced by above-trend GDP growth and lingering inflation concerns, shaped market movements.

The Initial Surge and Subsequent Correction

The days immediately following the election witnessed a frenzy of activity. The Goldman Sachs basket of the most-shorted stocks saw a remarkable 10% jump between November 5th and the following Monday, reaching its highest point in two years. The ratio of call options to puts bought surged to its highest level since January 2022. This period was marked by a significant surge in speculative investments driven by optimism surrounding potential changes in policy. This rapid increase highlighted the market’s immediate response to the shifts in political power and the expectation of future changes.

Speculative Assets and Cyclical Stocks

The initial surge was particularly pronounced in sectors considered favorably positioned under a new administration. This included retail investor favorites seen as aligned with the incoming regime’s policies. However, this rapid ascent soon faced a counterbalance. Last week marked a period of consolidation, with many of these speculative plays experiencing a temporary pullback. This pullback coincided with challenges for mega-cap technology stocks, which contributed to a 2% decline in the S&P 500 for the week. This downturn led to a return to the pre-election highs seen in mid-October, suggesting a temporary stabilization after the initial boom-and-bust cycle.

A Deeper Look at Market Indicators

Despite the week’s dip, the broader market picture remains largely positive. The S&P 500 is still above levels that would trigger major concerns regarding the underlying trajectory. The Nasdaq 100, which had yielded its leadership position, is now back to levels seen in early July. These developments highlight a more nuanced narrative within the market, where not all sectors are experiencing parallel movements. This rotational shift indicates the market’s selective approach as investors analyze how different sectors are likely to perform under new political and economic conditions.

Small-Cap and Bank Performance

The market’s selective nature is further evidenced by divergences among different market segments. Interestingly, while the S&P 500 pulled back, the small-cap Russell 2000 remained up 1% from its October 18th level. The KBW Bank Index showed an even more dramatic increase, up by a notable 10% during the same period. Even during the 1.3% decline in the S&P 500 on Friday, a significant portion of individual stocks remained positive, showing a lack of widespread panic or negative sentiment.

Underlying Market Drivers Remain Relatively Stable

The post-election market adjustments do not seem to significantly alter the longer-term trend. The underlying economic and financial conditions, even taking the election into consideration, continue to support a broadly positive outlook. This makes the market’s selective reallocation—more towards cyclical exposure and away from those anticipating government spending cuts—appear more of a tactical shift than a wholesale systemic change.

Economic Growth and the Federal Reserve’s Stance

Several key factors underpin this relatively stable outlook. The steady two-year bull market trend remains in place. Corporate earnings are showing improvement. Credit spreads are near their tightest levels of this cycle. Treasury yields have risen alongside positive economic data, signaling a robust economy. While the rise in the 10-year Treasury yield to above 4.4% and the increase in the ICE US Dollar Index may be partly attributable to the election outcome, their impact seems more acceleratory than inflectionary. The Federal Reserve’s stance, marked by a cautious approach to rate cuts, plays a critical role in this equation.

Chair Jay Powell’s statement emphasizing “no hurry” to further cut rates reflects the Fed’s ability to manage monetary policy based on a strong economy, a positive signal for both the economy and the stock market.

Investor Sentiment and Valuation Levels

The market’s measured response after the initial post-election excitement is partly explained by the existing market conditions. The bull market’s maturity, elevated valuations, the existing outperformance of cyclical groups, compressed credit spreads, and already optimistic investor sentiment contributed to a decreased need for aggressive investment.

Retail Investor Exposure and Strategic Considerations

Retail investors’ significant equity exposure and the absence of extreme levels of margin debt further suggest a diminished need to chase market gains. While some strategists questioned the need to shift into riskier stocks given the maturity of the economic and risk cycle, the longer-term outlook remains positive, especially with potential support from growth-enhancing policies.

Wall Street’s Outlook and Future Expectations

It’s notable that Wall Street strategists’ average and median 2025 targets generally fall below the current market index level. This suggests a possible reluctance of market professionals to push ahead at the current stage, hinting at a cautionary perspective not fully reflected in market behavior. Another key indicator to watch is the level of corporate deal-making and new equity offerings. A significant surge in mergers and IPOs would signal increased confidence and potentially fuel further market growth. The market’s performance in the coming months will offer clearer insights into whether the bullish sentiment is overblown or justified as we look towards 2025.

In conclusion, the post-election market reactions highlight the interwoven interplay between short-term fluctuations, long-term trends, and strategic investor adjustments. The ongoing tension between exuberance and pragmatism will define market dynamics in the coming months, as investors reconcile immediate political shifts with underlying economic fundamentals and long-term investment strategies. The market successfully demonstrated the ability to respond swiftly to electoral results, but also to take a pause, reassess, and continue its established trend.