The week of 4 November 2024 was definitely an interesting one for the stock market. We had the US presidential elections as well as a Federal Open Market Committee (“FOMC”) meeting all in the same week. The effect of both events set differing expectations for the market, especially as we expect new policies to start coming into play. This article will be a small recap of the main impacts that investors will see moving forward into 2025.
To kick-start, with the Republican Party win in the elections, this puts tariffs being back in the spotlight, something that the Republican Party was very keen to use previously as a method to defend against competition. Any reasonably educated person will know that tariffs does not affect companies as these companies will just simply pass on any additional costs from their production to the consumers. All tariffs do is just increase consumer prices which directly drives inflation.
There may also be changes to the different wars that are happening around the world. Not to forget, it was under Trump’s Republican administration where he announced the withdrawal of troops from Afghanistan. Although this was completed by Biden’s Democratic Party during his term, this should be seen as the Republican Party’s stance to not be involved in conflicts. I am unable to decide if this is a good thing for the U.S. to not waste resources in the conflicts of others, given that there will be indirect impact to their economies through possible supply chain disruptions. There is a possibility that Ukraine may be handed to Russia if Trump decides to withdraw all support for them, which in turn will drive up inflation given that Ukraine is one of the largest wheat producers in the world and Russia may attempt to capitalize on that.
Website: Trump’s Afghanistan withdrawal announcement takes US officials by surprise
This brings to light that we are in an interesting position because the US Federal Reserve has recently just started embarking on interest rate cuts over the last few months, with the latest quarter-point cut on Thursday, 7 November 2024, bringing the interest rate to between 4.50 and 4.75 per cent. Such decision was made based on historic indicators and having the FOMC meeting just one day after elections definitely discounts any impact from the election results.
Website: US Federal Reserve makes quarter point cut amid post-election uncertainty
Referring to the U.S. 10- year Treasury, on 6 November 2024 after the election the yield reached a high of 4.757% before coming back down to normalize. The rates for the first week of November 2024 is notably higher than October 2024, indicating that it has recovered from the knee jerk reaction when the FOMC first announce cuts in September 2024. It does indicate as well that the market forces expect the yield to remain high moving forward, taking into considerations the possibility of continued high inflation and therefore the need for interest rates to remain high as a tool to combat it.
Website: U.S. 10 Year Treasury
For the record, I had a good laugh when reading about the part where when asked whether he would step aside if President-elect Donald Trump asked him to resign, Powell simply said: “No.” It is true that the President will have no direct way to force him to resign. It does show that the two parties will likely be at loggerheads when it comes to monetary policies. Trump is someone who wants interest rates to be as low as possible, something that Powell may have an issue dealing with if inflation continues to remain high.
Website: Powell says he would not resign as Fed chief if Trump asked for his resignation
What does this mean for us as retail investors?
A high-interest rate environment will continue to be a boon for banks, where they mainly earn their profits capitalizing on interest spreads. In this case, the high-interest rate allows for banks to have more flexibility to manipulate larger spreads.
However, it is detrimental to Real Estate Investment Trusts (“REITs”) given that many properties are usually bought on leverage. A high-interest rate environment will drive up the financing costs for REITs which will continue to have a negative impact on their distributions. This effect is doubled on the share price as not only will your yield be lower, but your share price will continue to experience a downward pressure given that there will be safe assets which substantially highly yield. Naturally to reflect the risks of holding on to a REIT, the share price may be trading at a larger discount.
For investments into other kinds of companies that are neither a bank nor a REIT, investors should analyze the financials to determine the amount of debt taken as well as the countries these companies operate in. Especially in today’s global market, it is not surprising if a significant portion of a company’s cost of goods may come from countries that may be in the direct line of fire of new potential tariffs. For companies that are unable to manage and pass on these costs, we can expect them to start making losses and may be forced to close if it is unsustainable.
Overall, definitely a week which should prompt investors to reassess their risk appetites and adjust their strategies accordingly.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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