1. Investors crowned U.S. small cap equities as the biggest winner of the U.S. election.
U.S. small cap stocks rallied almost 11% in November on the back of the results of the U.S. election. U.S. large cap stocks had a strong month too, surging almost 6%.
2. The outperformance on U.S. large cap equities over the last decade, especially over the trailing three and half years, is striking.
The U.S. economy has delivered stronger economic growth than most other countries and U.S. companies, especially information technology companies, have delivered stronger earnings than their foreign counterparts. However, U.S. equity market valuations have risen sharply while non-U.S. developed markets and emerging markets valuation have declined, in anticipation of current economic and corporate earnings trends being permanent. Some retracing in valuations is likely in the next few years, favoring non-U.S. equities.
3. Both financial markets and the Federal Reserve have become concerned the rate of inflation has plateaued above 3% and will not revert to its pre-pandemic trend of 2% anytime soon without a recession.
The “core” inflation rate (CPI excluding food and energy) remains over 1% above pre-pandemic levels. Second waves of inflationary pressure are also not uncommon throughout history. The Atlanta Federal Reserve Bank’s measure of “sticky price” inflation (think rent, insurance and medical care) is running a hair below a 4% annual rate.
4. The dust has settled regarding U.S. government elections and while there is still some fog clouding the picture of investment implications, there are a few clear takeaways.
First, tariffs and the threat of tariffs will be used by the incoming Trump Administration as a negotiating tool, especially when dealing with China and its mercantilist tendencies. Donald Trump has been singing the same tariff tune for four decades, starting in the 1980s with his concerns about the Japan export engine that at the time was dominating world trade in goods.
Second, the Trump Administration will lighten the regulatory burden facing U.S. businesses, especially small business.
Third, energy policy will shift to an increased focus on natural gas and nuclear energy for power generation relative to wind and solar.