The S&P 500 Index was the ultimate Thanksgiving gift to investors in US equities though the party poopah sectors like Big Pharma were the proverbial turkey. The post-election spike was only the icing on a cake that has been a dream for investors in the SPX, now up 27% with 53 record closes. America is 4% of the world’s population and 25% of its GDP but almost 70% of its market cap. In pure wealth generation terms alone, the 21st century sure looks like our planet’s 2nd American Century – for now. This was the year when Santa Clause did not wait until Christmas to stuff goodies like Nvidia, Meta, Vistra and constellation energy.
True, valuations are frothy and Trump’s policy agenda could trigger an inflation shock but the economic data in December suggests that the Fed rate cut cycle will not be derailed at the December FOMC. Core PCE was in line even as jobless claims fell to a 7-month low. 3Q real GDP growth is a stellar 2.8% and will remain anchored next year by both productivity growth and AI capex spending at a time when Europe and China both face the Big Chill of deflation. As Wall Street learnt the hard way in 2001, 2008 and 2021, a Fed tight money pivot is akin to Count Dracula confronted with a cross of gold in sunlight.
Will this happen in 2025? The consensus is for a rebound in nonfarm payroll growth to 190,000 in November after the two hurricanes and the Boeing strike distorted October jobs data. Assuming no big surprises, other than the usual revisions and a 4.2% unemployment rate that is still 0.5% above Claudia Sahm’s cyclical low, the Powell Fed will have the monetary policy ballast for another 25-basis point rate cut on December 18. Even though the hawks on the FOMC believe the progress on the core PCE has stalled, the Nov-7 Fed minutes suggests that the balance of risk to the dual mandate are evenly matched. Viola, Jay gifts Wall Street the rate cut it craves.
Trump’s decision to pick ex-Soros macro hedgie/fiscal hawk Scott Bessent as Treasury Secretary started the bond market rally that has now taken the 10 year Uncle Sam IOU from 4.45% to 4.19%, but I see storm clouds for the bond market in 2025 when Trumpnomics begins to have an impact on global trade, inflation and US labor market at a time when core PCE, on an annualized basis is still 2.8% or nowhere near the Fed’s 2% inflation target. So it does not surprise me that the CME Fed funds futures contract now prices-in only two cuts in 2025. Only half of the 4 cuts projected by the FOMC’s own economist.
Trump 2.0 has already had a seismic impact on global markets as world leaders line up to kneel before the Big Guy at Mar-a-Lago while Biden is a lame duck in the White House. The US Dollar Index surge after the election, EM was crushed, crypto went ballistic, gold sagged, China got blitzed, green energy and healthcare were slammed by Trump’s love for fossil fuels and selection of RFK Jr. as HHS Chief. Yikes!
Also published on Medium.
