Post-Election Equity Market Insights

Dec 12, 2024

Thoughts on the Market - Post-Election Equity Markets

Introduction

  • Speaker: Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist
  • Date and Time: Tuesday, December 10th, 11:30 a.m. in New York
  • Focus: Analysis of equity markets post-election and comparison with historical trends

Post-Election Market Trends

  • Animal Spirits: Potential rebound similar to post-2016 election optimism
    • Historical surge in corporate, consumer, and investor confidence
  • Current sentiment shows measured optimism, particularly in small business confidence
  • Services-related businesses exhibit tempered outlooks

Economic Factors

  • 2016 Context:
    • Coming out of an industrial manufacturing downturn
    • Supported by aggressive China stimulus
    • Low-interest rates globally
    • Better sovereign deficits and balance sheets
  • Current Context:
    • Less emphasis on expansionary fiscal agenda
    • Preference for cyclical sectors despite interest rate stickiness

Sector Preferences

  • Financials: Preferred overweight sector
  • Others: Software, utilities, and industrials

Interest Rates and Equity Returns

  • Positive correlation between S&P 500 returns and bond yield changes
  • Cyclical sectors show positive correlation with rates, except materials
  • Defensive sectors show negative correlation, except utilities
  • Stronger macro data still favored by the market

Interest Rates Dynamics

  • Potential for dynamic reversal if:
    • Interest rates rise due to less dovish monetary policy
    • Increase in term premium
    • Noted threshold: 4.5% on 10-year Treasury yield
  • Current rates below threshold, close to zero term premium
  • Cyclical Stocks Sensitivity:
    • Disproportionate impact from macro growth data weakness
    • 10-year Treasury yield sweet spot: 4% to 4.5%
    • Tolerance for rate changes depending on underlying causes

December Seasonality

  • S&P 500 historical median December return: 1.5%
  • Positive return 73% of the time, mostly in the second half
  • Russell 2000 small cap index higher return: ~2.5%
  • Potential enhancement from post-election small business confidence

Disclaimer

  • Content for informational purposes only
  • Not an offer or solicitation
  • Not tailored to individual financial circumstances or objectives