CNR Speedometers^®

This month, we are going to cover the most recent economic and market impacts following the election and update you on changes to the CNR Speedometers® in November.

Let's start with the top five themes following the election:

First, the potential for a red sweep could lead to the prioritization of growth within U.S. borders. Protectionist policies, including potential increases in tariffs, are expected to stimulate domestic industries, especially in sectors like manufacturing and energy.

Second, we expect fiscal policy to expand, accompanied by deregulation. With a potential Republican majority, we anticipate pro-growth fiscal policies, likely with tax cuts and regulatory streamlining, particularly within banks and other financial institutions.

Third, this expanded fiscal spending and these tax cuts are expected to boost growth but could also increase federal debt and inflationary pressure. This may result in a steeper yield curve, which would affect interest-rate-sensitive sectors. The interplay between these policies and inflation will be a critical factor.

Fourth, the administration's energy policy is likely to focus on deregulation and promote U.S. energy independence. By encouraging domestic energy production, the administration aims to stabilize long-term energy prices and strengthen energy security.

And last, President-Elect Trump's stance on immigration is expected to result in stricter policies, and that may lead to a tighter labor market. This could drive wage growth in lower-wage job sectors and industries that are reliant on a robust workforce, such as agriculture and construction.

Those sectors may face challenges if labor supply constraints drive wage inflation that could impact operating costs and pricing within them. Immigration policies could also create a drag on growth from a reduction in demand.

So, shifting over to the Speedometers®, let's start with a broad outlook. The U.S. economy continues to power along, bolstered by stable employment data, stronger consumer sentiment and balanced inflation expectations. The Federal Reserve's recent decline cut, coupled with the cooling and inflation, is a positive for growth. Consumer confidence is trending up, showing renewed optimism about long-term business conditions and personal financial health.

This is a positive sign for retail- and consumer-focused industries heading into the holiday season and supports broader economic momentum as we enter 2025. As a result, we've updated our Business Outlook, Fiscal Policy and Energy dials.

Dial 1: Business Outlook Spending/Surveys, 2:34— Starting with the Business Outlook, that indicator has shifted to green, and that reflects positive corporate growth and continued consumer demand. Improvements in employment and income prospects are contributing to increased consumer confidence, and that's lifting business sentiment to its highest level since about mid-2021. Businesses are seeing steady earnings growth, and with a pro-business environment in Washington, this trend is expected to continue. Sectors such as retail, technology and industrials could benefit as consumers and corporations remain confident in their financial positions.

Dial 2: Fiscal Policy, 3:06— On the Fiscal Policy front, we've also shifted into the positive green area. The expectation of pro-growth policies, including potential tax cuts and increased spending, could boost consumer spending and corporate profitability across multiple sectors. So, while there are concerns that increased spending may raise deficit levels, the short-term economic outlook is favorable. Companies operating in sectors that benefit from eased regulatory burdens and lower corporate taxes, such as financials, consumer discretionary and small cap stocks, are particularly well positioned in this environment.

Dial 3: Energy Costs, 3:38— And Energy Costs have improved, but they do remain in the yellow due to ongoing geopolitical risks. While energy prices are currently stabilizing, there's still a need for cautious optimism. Supply chains have strengthened, benefiting sectors depending on stable energy prices, but these potential geopolitical events do remain a risk factor. So, any sustained stability in energy prices is likely to have a positive impact on consumer spending and business operations, especially in industries where energy costs are a significant factor.

And aside from these changes, there are also a few Speedometers® that have been in focus this week, which include updates on the Federal Reserve, sentiment and inflation.

Dial 4: Inflation, 4:16— The 25-basis point rate cut brought the federal funds rate to a target of about 4.5% to 4.75%. Fed Chair Jerome Powell emphasized the Fed's commitment to stabilizing inflation with an approach that will adapt based on incoming economic data.

The Fed's current trajectory of gradual rate reductions through early 2025 aligns well with pro-growth fiscal policies, creating favorable conditions for equity markets. Further, Powell took a hard line in stating that he will not step down as Fed chair until his term expires, regardless of expected pressure from the White House.

Dial 5: Consumer Sentiment, 4:49— Consumer Sentiment has also reached a seven-month high, as reported by the University of Michigan. Americans are expressing increased confidence in both long-term business conditions and personal financial outlooks, signaling a positive close to 2024.

And on the inflation front, year-ahead expectations have slightly decreased to about 2.6%, while long-run inflation expectations remain steady at 3.1%. These indicators underscore a strong base of optimism for economic stability, with consumers confident that inflationary pressures will remain under control.

The last area I want to address is the status of the Trump trade. The market's reaction has been strong, particularly in sectors aligned with pro-growth policies. The financials, industrials, consumer discretionary and energy sectors have all shown positive performance as investors price in supportive regulatory conditions and the promise of favorable fiscal policies.

Small cap stocks closely tied to domestic growth have also seen gains, as they benefit directly from a U.S.-focused economic agenda. The outlook for these sectors remains bright, with continued potential for gains through the end of the year.

In conclusion, as we look toward the end of 2024, economic indicators and market conditions are in good shape. The Fed's supportive policy stance combined with improving consumer sentiment and pro-growth policy initiatives is likely to foster a stable environment for continued expansion and market performance. And based on the election results, we continue to believe the U.S. market is the most attractive investment landscape as we approach the new year.