11-19-24: The Pause That Refreshes – Before the Year End Rally

by Bryan Perry

November 19, 2024

When it became clear that Donald Trump won the race for the White House, and the GOP won the Senate, the Dow Jones Industrial Average moved higher by 2,250 points (+5.3%), the S&P 500 by 240 points (+4.2%), the NASDAQ by 960 points (+5.3%) and the Russell 2000 by 180 points (+8.0%).

To call that just a “Trump bump” seemed like an understatement. For Wall Street, the immediate message was pro-business, lower taxes, energy independence and a more favorable regulatory environment.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Large money flows into equities for four straight sessions left a huge technical air pocket underneath the market and, true to form, that air pocket was filled, to a large extent, in the next four trading sessions last week, amid violent sector rotation. The winners and losers from the forthcoming Trump administration and GOP majority in Congress crystalized as last week unfolded, with the newly created Department of Government Efficiency (DOGE) getting most of the attention. Co-chaired by Elon Musk and Vivek Ramaswamy, this dynamic duo is initially targeting what has been identified as $500 billion in fraud and waste, cutting $2 trillion in government spending to eliminate waste to streamline government operations.

Their plan involves slashing excess regulations, eliminating and restructuring government agencies. Gary Cohn, director of Trump’s National Economic Council in his first term, said they could look at regulatory agencies that have “overlapping jurisdictions as a means of boosting efficiency and controlling costs.”

Once this reality check of actual cost-cutting targets sank in with the markets, there was some widespread selling of stocks in the aerospace/defense sector, the government consulting sector, government REIT sector, renewable energy and the big pharma and biotech sectors, where government waste and fraud has been long thought of as a “way of life.” There was also heavy selling in stocks of companies depending heavily on products made outside the U.S. – namely China, and, to some extent, Mexico.

Also, the notion of higher tariffs and duties on imported products sparked fresh concerns of supply chain choke points and higher prices to be passed on to businesses and consumers, possibly reigniting inflation and thereby forcing the Fed to pause on any further rate cuts. Hence, the bond market sold down all week with the 10-year Treasuries briefly hitting 4.5% last Friday before easing back to close the week at 4.4%.

The dollar also put in a sizzling rally, as did Bitcoin, while the price of gold and crude oil tumbled. The Magnificent Seven stocks also took a sizable hit, most of which occurred in Friday’s 2.2% decline for the NASDAQ. It was as if traders wanted to sort out their portfolios and reposition them for what they suspect lies ahead – which sectors will thrive in the Trump era, and which sectors will face major headwinds.

So, what really does lie ahead? One can argue that the switching and selling this past week is “the pause that refreshes” before the next rally begins. Nearly every leading stock that enjoyed a straight up move after the election was already technically very overbought on a short-term basis. Chasing event-driven momentum is typically a bad strategy, but those that booked profits on the whoosh higher did quite well.

I believe that those that have a lot of cash on hand are in an excellent position to buy great stocks on this volatile market pullback as we enter what is seasonally the best time of the year for stock market performance.

The charts of the S&P 500, NASDAQ and Russell 2000 are technically compelling. If the bond market just stabilizes, as it should with last week’s tame CPI and PPI reports showing inflation running at a modest 2.6% pace year-over-year, market participants can refocus on fourth-quarter economic growth that should result in higher sales and earnings, as market indexes have pulled back to their 20-day moving averages.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Aside from leading AI infrastructure and software stocks, other sectors that may benefit from the next wave include financials, specifically private equity and M&A, energy exploration, industrials with domestic operations, U.S.-based REITs, consumer discretionary, communications services and utilities.

Last week’s shake-out provides investors the consolidation they needed to buy great stocks at great prices. It is imperative that a firm bid comes back to the bond market and, with the dollar in rally mode, it sends a good signal to see Treasuries sporting higher yields than those sovereigns of other developed nations.

Looking across the globe, the yield on the U.S. 10-year Treasury stands out for the highest return among stable developed economies with strong and reliable currencies, as displayed in this comparative listing:

The good news is that cash-rich investors that thought they missed out on the Trump trade now have a buying opportunity heading into the second half of November, which historically kicks off year-end rally conditions. Did Christmas on Wall Street come early? Considering how 2025 is shaping up – probably so.