Daily market snapshot

Wednesday, 11/06/2024 p.m.

• Stocks rise to a record after Trump win – North American equity markets finished broadly higher as Donald Trump reclaimed the White House, surpassing the 270 electoral votes needed to win the presidency. The decisive win removed the overhang of an unclear or contested outcome, clearing a source of uncertainty, and triggering a risk-on market reaction. The Senate has already been called for the Republicans, while the House of Representatives is still up for grabs. While Republicans project confidence about controlling the House as well, any majority will likely be slim no matter which party wins.
  
  Over the past couple of months Trump's election prospects have been closely related with higher Treasury yields, a higher U.S. dollar, and outperformance from cyclical stocks, and these were the areas of the market that experienced the biggest moves after the election result. Based on the proposals for tax cuts, deregulation and tariffs, the potential scenario of a Republican sweep is seen as boosting economic growth in the short term, but also leading to higher inflation, government debt and interest rates. Small-cap stocks outperformed, rallying 5.5% on stronger growth hopes, but Treasury bonds were under pressure, with the 10-year yield hitting a four-month high on inflation and fiscal debt concerns*. Over the coming days and weeks investors will likely shift their focus to how many of the campaign promises may be implemented and over what time frame, with the makeup of Congress being a key deciding factor.
• Positive fundamentals offer stability – While the dust may take some time to settle after the election, markets will continue to take their cues from the outlook for economic growth, earnings and Fed policy. These are the long-term determinants of market performance, and they currently suggest that fundamental conditions remain more favorable than hurtful. Starting with growth, the economy has consistently defied expectations for a recession over the last two years, even expanding at an above-average pace. While a moderate slowdown is likely, several indicators remain strong: incomes are rising, jobs are being created, and consumers remain financially healthy. Additionally, lending standards have stopped tightening, and loan growth appears to be bottoming out. This forms a solid foundation for rising corporate profits, with S&P 500 earnings growth projected to accelerate from 0.5% in 2023 to 9% this year and 14% in 2025*. Though next year's estimates may be a bit optimistic, the upward trajectory can help sustain the bull market, which has now entered its third year. On the interest-rate front, the improvement in inflation is allowing the Fed to gradually remove some of its restriction and likely lower interest rates through 2025, including its second rate cut likely this Thursday. The upshot is that positive growth, rising earnings and falling interest rates are consistent with the Fed possibly achieving a soft landing.
• Broadening theme intact, volatility creates opportunities in bonds, but inflation and debt concerns are top of mind - Given the supportive fundamental conditions and the overhang of an uncertain outcome removed, we maintain our positive view on equities. The potential for tax cuts and deregulation may provide an additional tailwind to our theme of broadening market leadership, which has started to take shape in the third quarter. Cyclical sectors, along with small- and mid-caps, have room to catch up as the market rally broadens beyond tech. However, we would also caution that markets historically tend to overact the day after the election, so it wouldn’t be surprising if some of the initial optimism fades in the coming days. On the fixed-income side, a potential Republican sweep may bring fiscal concerns back to the forefront amid growing deficits and elevated debt. However, we think higher yields offer another chance to extend the duration of portfolios ahead of lower rates on cash investments. A slower pace of Fed rate cuts is possible if inflation proves persistent, and this is reflected in today's adjustment to rate expectations, but we think that yields are currently attractive and at the high end of their potential range. Repositioning into intermediate- and long-term bonds where appropriate can help lock in the high yields for longer.

Angelo Kourkafas, CFA 
Investment Strategist

^{Source: *FactSet}

Tuesday, 11/05/2024 a.m.

• Stocks open higher on U.S. Election Day – The TSX and major U.S. equity markets are up this morning, with large-cap stocks leading small- and mid-cap stocks. Sector performance is broad, as technology and industrial stocks are posting the largest gains. Bond yields are continuing their trend higher, with the 10-year Government of Canada yield near 3.27% and the 10-year U.S. Treasury yield near 4.36%. In global markets, Asia was mostly higher, while Europe is mixed*. The U.S. dollar is declining versus major currencies. In the commodity space, WTI oil is adding to gains following the OPEC+ decision to push back its planned production hikes by a month. Gold is also trading higher.
• Markets focus on U.S. presidential election and FOMC meeting – Polls suggest the race between the candidates remains tight, which could lead to a drawn-out process of recounts and no definitive winner on election night. While political uncertainty can drive market volatility in the short term, we'd remind investors that over the long run, markets are driven by the economy and fundamentals, both of which are moderating but remain solidly positive, in our view. The resolution to the election results will remove uncertainty that has been an overhang for markets for several months. On the monetary-policy front, the Federal Reserve's Federal Open Market Committee (FOMC) will conclude its November meeting on Thursday, with markets expecting a 0.25% interest-rate cut**. If the Fed cuts, it would mark the second rate cut of this cycle, bringing the policy-rate target range to 4.5% - 4.75%.* In our view, the Fed is likely to cut rates by 0.25% on Thursday and will likely deliver another 0.25% rate cut at its December meeting.
• Corporate earnings have been strong relative to expectations - With 76% of companies reporting third-quarter earnings, 74% have beaten analyst estimates, resulting in 5.2% earnings growth year-over-year*. Earnings growth is expected to be broad, with eight of the 11 sectors forecast to report higher earnings year-over-year*. The three sectors forecast to have lower earnings – industrials, energy and materials – represent less than 15% of the market capitalization of the S&P 500*. Broadening earnings have contributed to a rotation in market leadership. Over the past six months, the real estate, financials, utilities and consumer discretionary sectors have each outperformed the communication services sector, which led markets higher earlier in the year*.

Brian Therien, CFA 
Investment Strategist

^{Source: *FactSet **CME FedWatch}

Monday, 11/04/2024 p.m.

• Stocks mostly lower ahead of U.S. election day – U.S. equity markets were mostly lower on Monday and the TSX was little changed, with all eyes on the 11/5 U.S. presidential election. The TSX finished near the flatline, while the S&P 500 and Nasdaq both fell by 0.3%. Strength in the energy sector led to modest outperformance of the TSX relative to U.S. markets.* Overseas, Asian markets were higher overnight, while European markets closed mostly higher as well. After a sharp run higher in recent weeks, bond yields finished lower, with the 10-year GoC yield falling to 3.25% and the 10-year U.S. Treasury yield ticking down to 4.3%.* In the commodity space, oil prices were higher by about 3% following an OPEC+ decision to delay a planned production increase by one month.* Elevated geopolitical tensions in the Middle East played a role in higher oil prices as well, with reports surfacing over the weekend that Iran is planning a retaliatory response to Israel's late-October airstrike.
• Presidential election and FOMC meeting headline a busy week – The U.S. presidential election will no doubt dominate headlines for the week. Polls suggest the race is tightly contested, which could lead to a drawn-out process of recounts and no definitive winner on election night. While political uncertainty can drive market volatility in the short term, we'd remind investors that over the long run, it’s the economic backdrop and fundamentals that drive markets, not politics. Turning to the monetary policy, the FOMC will conclude its November meeting on Thursday, with markets expecting a near 100% probability that policymakers will deliver a 0.25% rate cut.* If expectations come to fruition, this would mark the second Fed rate cut of this cycle and bring the policy-rate target range to 4.5% - 4.75%.* In our view, the Fed is likely to cut rates by 0.25% on Thursday and will likely deliver another 0.25% rate cut at its December meeting. This week will also provide a read on domestic labour-market conditions with the labour-force survey out on Friday.

• How do stocks perform after U.S. election day? – With U.S. election day fast approaching, it can be easy to get lost in political headlines. We'd remind investors that despite volatility around election day, stocks have historically performed well in the months that followed. The study below details how the S&P 500 has performed after election days since 1952.

  • 1 day after: Since 1952, the average return of the S&P 500 on the day after a U.S. presidential election is -0.3%, with returns positive only 44% of the time.**
  • 1 month after: One-month post-election day, the S&P 500 has seen better returns, gaining on average 1.3%, with returns positive 61% of the time.
  • 6 months after: In the six months following election day, the S&P 500 has on average gained 5.5%, with returns positive 72% of the time.
  • 1 year after: The S&P 500 gained 8.6% in the one year following election day with returns positive 61% of the time.

  While there is no guarantee history will repeat itself in 2024, we believe this should offer investors confidence that equity markets can overcome any short-term bouts of politically driven volatility, regardless of political outcomes.

Brock Weimer, CFA 
Associate Analyst

^{Source: *FactSet. **Morningstar Direct and Edward Jones. S&P 500 Price Return. 1952 – 2020.}

Friday, 11/01/2024 p.m.

• Stocks rise to kick off November – Canadian and U.S. equity markets finished higher on Friday, helped by tech earnings and expectations that the Fed will cut interest rates next week. A weak but also noisy jobs report that was impacted by the hurricanes and the Boeing strike initially drove yields lower, but the move later reversed, and the 10-year GoC yield finished at a three-month high*. On the corporate front, shares of Amazon climbed 6% after the company reported better-than-expected profitability, and shares of Intel rose roughly 8% on positive guidance*. On the flip side, Apple's earnings were met with some skepticism after a modest disappointment in revenue guidance. Overall, sentiment was positive to start the new month, with all major indexes higher, while the traditionally defensive sectors underperformed. Elsewhere, oil prices were marginally higher, as investors digested headlines about potential Iran retaliation to last weekend's airstrikes.
• Storms and strike drive soft U.S. jobs report – The U.S. economy added 12,000 jobs in October, missing consensus expectations for a 100,000 increase, and the slowest pace of hiring since 2020. Health care and government continued to drive the hiring, while manufacturing employment decreased by 46,000 jobs, largely due to the Boeing strike*. The two recent hurricanes also likely had an impact, as the number of workers who reported they couldn’t be at work due to bad weather surged, creating additional noise in the data. Nonetheless, the prior two months' job gains were revised downward, indicating that the September report was not as strong as it first appeared, providing more confidence that the Fed will continue to cut rates in its two remaining meetings of the year. The rate of unemployment held steady at 4.1%, and the hourly wage gains held steady at 4%*. The key takeaway, in our view, is that temporary disruptions had a discernible impact on the labour market last month, but, when trying to isolate these factors, the trend of a gently cooling labour market likely persists, allowing the Fed to continue removing its restriction in the months ahead.
• Higher yields and election uncertainty weighed on October sentiment – After five months of gains, stocks posted a modest decline last month, as a rally in Treasury yields and next week's U.S. election uncertainty provided reasons for caution. October was the worst month for government bonds in two years, driven by a combination of stronger-than-expected economic and inflation data that led to a shift in Fed expectations*. Concerns over U.S. debt also added to the recent bond volatility. Next week the market will be focused on the presidential election, which may trigger a knee-jerk reaction. Yesterday's rise of the volatility index (VIX) to the highest since August is consistent with the historical pattern of bigger price fluctuations around Election Day*. Despite the near-term uncertainty, the fundamental environment remains supportive. Yields appear to be rising for the right reasons, with the economy resilient, as indicated by this week's GDP data, and recession probabilities have dropped. We would view any election-driven pullback opportunistically, and we don't expect much further upside in yields as the Fed gradually cuts interest rates further through 2025.

Angelo Kourkafas, CFA 
Associate Analyst

^{Source: *FactSet}

Thursday, 10/31/2024 p.m.

• Stocks dragged lower by tech weakness – The major averages closed notably lower on Thursday, as investors digested a mix of incoming economic and earnings data – the theme of which has been "good but short of expectations." Wednesday's U.S. GDP report showed the economy grew by 2.8% last quarter, a healthy pace, but shy of the 3% mark that consensus expectations were looking for, leading to a modestly lower close for the stock market. The script was similar today, in this case with quarterly earnings results from Meta and Microsoft failing to hurdle the bar of high expectations. Bond yields edged a touch lower on the day, with the 10-year Government of Canada bond yield just above 3.2%, having been below 3% one month ago. With markets primarily guided by the evolving balance between the labour market, inflation and central-bank policy, it was a big day on the data calendar, with the tone being set by the release of U.S. initial jobless claims alongside the latest reading on consumer prices. The next several days will be chock full of influential events, including Friday's September U.S. payrolls report, followed by the U.S. presidential election and the Fed interest-rate decision next week.*   
• Inflation data showing some stickiness – The release of the U.S. personal consumption expenditures deflator (a measure of consumer-price inflation that the Fed prefers) showed that the month-on-month rate moved higher, driven by firmer core services prices (excluding housing). This left the annualized rate of inflation at 2.7% for the third consecutive month. There are a few ways we interpret this data: 1) The path ahead for inflation is likely to be choppier, compared with the steadier pace of moderation over the last 18 months. 2) The pace of inflation is sufficiently cool that the Fed does not need to rethink its broader approach to policy easing, but it is still high enough that the Fed will need to be more measured from here, potentially taking pauses between rate cuts to assess the trend in consumer prices. And 3) The source of stickiness (services prices) is a reflection of the ongoing strength in the economy, particularly in consumer spending.  While we'll need to see further progress on core inflation, the fact that economic resilience is accompanying this next leg of disinflation is (assuming inflation does continue to moderate) a broad positive for financial markets, in our view. 
• Employment trends remain supportive – This week includes a bevy of labour-market readings, the most important of which will come on Friday morning with the release of the U.S. nonfarm-payrolls report (Canada's September jobs report will be released next week). The appetizer today was the read on U.S. initial jobless claims, which declined from the previous week and fell to its lowest since May. This measure of employment bounces around week to week, but the overall trend in jobless claims remains rather favourable and consistent with a labour market that is softening but not deteriorating. Markets will take their larger cues from tomorrow's payroll report, though we suspect there will be a fair bit of noise in the coming jobs data given the impact of the recent hurricanes.  Nevertheless, employment conditions continue to provide broad support to consumer spending, which will be particularly helpful heading into the holiday shopping season, as the economy looks to close out 2024 will another quarter of above-trend GDP growth.

Craig Fehr, CFA 
Associate Analyst

^{Source: *FactSet}