Market Review
Post-election rally leads to strongest month of the year for U.S. equities
Elevated market volatility ahead of the November U.S. federal elections quickly subsided once results were reported — much quicker than expected — leading to the best monthly returns for U.S. equities so far in 2024.
In sharp contrast with November 2016, the most recent example of a similar Republican “red wave,” growth-style equities led over value. Also, in contrast to November 2016, positive returns for fixed income were led by investment-grade corporate credit. While credit spreads hit new business cycle lows in November, we believe it’s largely a function of easing financial conditions in anticipation of additional interest rate cuts from the Federal Reserve (Fed).
Like 2016, smaller-capitalization stocks outpaced large and mid-cap, and international equities materially lagged U.S. equities, with the MSCI Emerging Markets Index down 3.6%. International markets faced several headwinds during November. The MSCI World ex U.S. Index was essentially flat for the month due to country-specific issues, such as political developments in France that drove the country’s return down 4.2%. U.S. dollar strength also presented a challenge, with the U.S. Dollar Index up 4.9%, its strongest two-month return since mid-2022.
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Theme of the Month
Taking stock of the election
While every election cycle is unique, when it comes to correlations between election outcomes and certain economic and market indicators, trends have emerged over time. Relative to this year’s election, however, virtually every traditional economic and market indicator “prediction” was wrong (Figure 1).
Figure 1. Traditional Election Cycle Indicators
New betting markets proved correct while traditional indicators were wrong
| Expectation | Result | |
| Real disposable income per capita | Incumbent | Wrong |
| Payroll growth rate | Incumbent | Wrong |
| Price of gasoline (y/y change) | Incumbent | Wrong |
| Misery Index | Incumbent | Wrong |
| S&P 500 three-month return | Incumbent | Wrong |
| CBOE Volatility Index | Incumbent | Wrong |
| Betting markets | Challenger | Right |
As of 11/30/2024. Source: Bloomberg L.P.
According to current economic data, such as strength in real disposable income per capita, positive payroll growth rates and benign gasoline prices, the election should have led to positive outcomes for the incumbent party. As we have cautioned in the past, there is no true predictor of election outcomes, and this cycle proves it.
Other metrics, such as the Misery Index (the sum of the unemployment rate and Consumer Price Index (CPI)), also pointed to the incumbent party as inflation came down and unemployment was relatively unchanged.Most notably, if the S&P 500® is up in the three months prior to the election, it’s usually a strong signal for the incumbent party — but not this year, despite the S&P 500 being on track to post one of the strongest annual returns in the past 20 years. In fact, while the Misery Index and the S&P 500 don’t quite have a perfect track record, never in history have they both been wrong in the same election cycle.
Interestingly, a new indicator forecasted the election outcome accurately: betting markets. Both
predictit.org and the cryptocurrency betting market, Polymarket, gave much higher odds to a Republican victory compared to consensus. We believe the unique 2024 election cycle might also signal that the path forward for markets may differ from investor expectations.
First, the global business cycle is in a very different position than it was in November 2016; the former is in the slowing expansion phase, while the latter was in an accelerating expansion. Second, the Fed and other central banks are loosening monetary policy, while in 2016, the Fed was amid policy tightening. While some investors may be concerned about potential policy actions that could reignite inflation, the Fed’s policy rate is still 4.75%, whereas the October CPI reading was 2.6% (Figure 2).
Figure 2. Fed Funds Rate vs. CPI
Fed policy remains restrictive, providing room for more rate cuts
As of 11/30/2024. Source: Bloomberg L.P.
View accessible version of this chart.
In other words, the Fed still has a lot of room to cut rates, and inflation remains well anchored compared to the days when it was at 9%.
Although CPI has fallen, the outsized deficit continues to pressure inflation and long-term interest rates. In the most recent reading, the deficit widened from the prior month, and at -6.9%, it’s one of the largest monthly deficit readings of the past year. With the expiration of the debt ceiling suspension set to occur on January 1, a potential breach of the ceiling and the enactment of “extraordinary measures” by the U.S. Treasury could prompt inflation and interest rates to move higher.
Consensus estimates that the Treasury’s general account cash balance will approximate $700 billion at the start of 2025. At an average year’s spending pace, resources should hypothetically exhaust themselves by August 2025, unless a debt ceiling compromise is reached beforehand. Until then, reliance on the Treasury’s general account would be an implied source of direct liquidity for financial markets. Therefore, while the debt ceiling debate itself may be a headwind for markets, the liquidity support would serve as an offsetting tailwind.
Despite the unknowns of future policy and trade, we have greater insight into the earnings outlook, which remains quite favorable. The current consensus S&P 500 earnings growth rate for 2025 is 15%, and while we believe this rate will likely decrease some, even a 10% or upper-single-digit earnings growth rate would be a strong reacceleration from 2024, especially when most earnings growth came from mega-cap tech stocks.
A reacceleration in 2025 will also depend on a recovery in manufacturing activity, which has been in contraction for two years but has recently improved. While only one data point, the ISM® Manufacturing New Orders Index report from December 2 reached the highest level since March, implying activity expanded in November (Figure 3).
Figure 3. ISM® Manufacturing New Orders Index
An improving New Orders Index is positive for manufacturing, but can it continue into 2025?
As of 11/30/2024. Source: Bloomberg L.P.
View accessible version of this chart.
Furthermore, the index’s six-month rolling average increased for a second consecutive quarter, another important indicator for investors to maintain a positive outlook for 2025.
For more information, please contact your PNC advisor.
Figure 1: Traditional Election Cycle Indicators
New betting markets proved correct while traditional indicators were wrong
| Expectation | Result | |
| Incumbent | Wrong | |
| Real disposable income per capita | Incumbent | Wrong |
| Payroll growth rate | Incumbent | Wrong |
| Price of gasoline (y/y change) | Incumbent | Wrong |
| Misery Index | Incumbent | Wrong |
| S&P 500 three-month return | Incumbent | Wrong |
| CBOE Volatility Index | Incumbent | Wrong |
| Betting markets | Challenger | Right |
As of 10/31/2024. Source: Bloomberg L.P.
Figure 2: Fed Funds Rate vs. CPI
Fed policy remains restrictive, providing room for more rate cuts (view image)
| Date | Fed Funds | CPI (%) |
| 12/2019 | 1.75 | 2.3 |
| 5/2020 | 0.25 | 0.1 |
| 10/2020 | 0.25 | 1.2 |
| 3/2021 | 0.25 | 2.6 |
| 8/2021 | 0.25 | 5.3 |
| 1/2022 | 0.25 | 7.5 |
| 11/2022 | 4 | 7.1 |
| 4/2023 | 5 | 4.9 |
| 9/2023 | 5.5 | 3.7 |
| 4/2024 | 5.5 | 3.4 |
| 11/2024 | 4.75 | N/A |
As of 10/31/2024. Source: FactSet®. FactSet® is a registered trademark of FactSet Research Systems Inc. and its affiliates.
Figure 3: ISM® Manufacturing New Orders Index
An improving New Orders Index is positive for manufacturing, but can it continue into 2025? (view image)
| Date | ISM Manufacturing New Orders Index | |
| 12/2014 | 58.2 | 50 |
| 4/2016 | 55.8 | 50 |
| 8/2017 | 60.7 | 50 |
| 12/2018 | 52.5 | 50 |
| 4/2020 | 27.3 | 50 |
| 8/2021 | 63.8 | 50 |
| 4/2022 | 53.7 | 50 |
| 11/2024 | 50.4 | 50 |
As of 11/30/2024. Source: Bloomberg L.P.
