No one could have envisioned this election year!

Groceries. And the cost thereof. Plus, shelter. Which of us does not know a millennial who says they will never be able to afford a home? By standard metrics, all should be well. The economy gives every sign of being strong, and inflation has been at least fairly low for quite some time. Sure, the price of a potato chip has stabilized, but at a price level 50% higher than pre-Covid! The Covid handouts may have caused the inflation, but they are lost in the mists of mental accounting by now. In any event, the inflation may have re-elected President Trump. I don’t recall seeing anyone forecasting such a decisive and clean victory as this, though. No drawn-out counting and he also won the popular vote. And while at this writing the deciding House races aren’t yet final, it appears likely there will be a GOP sweep. Polymarket says there’s a 97% chance of a sweep now. It could take a few more days, but the result is likely to be a tiny majority of five seats or even fewer. With a majority in the House, the GOP can preserve the Trump tax cuts, which are due to expire at the end next year. Since it’s a fiscal measure, the “reconciliation” process can be used, and only 51 Senate votes would be needed, meaning that the Democrats couldn’t block it with a filibuster. It will be interesting to see whether Republican fiscal hawks in either chamber send back the bill when it comes. That’s hard to imagine. Meanwhile, wither the pollsters…

For the markets it’s been 2016 all over again, with stocks at new all-time highs, small caps in clover and bonds selling off. For stocks anyway, Trump’s victory was not priced-in. Eventually, those rising bond yields will prove a problem for stocks—a concern voiced by an executive in my Dallas meeting this week. An equity melt-up could happen. Worth noting, to that point, that a GOP sweep has historically been better for the S&P 500, on average, than a Republican president with a split Congress (13% versus 5%). This time, the sweep would make enactment of the tax cuts easier than in a split Congress. Still, even if he has no further elections, his party does. Trump is unlikely to impose measures that cause market unrest—or an inflation surge. The S&P 500 has historically returned a median 4% between Election Day and the end of the year. This year, that would mean about 6,015 on the S&P and imply a forward price-earnings ratio of 22. (We are at 6,009 as of this writing. Hmm.) Meanwhile, we are in what is, seasonally, the best time of the year for stocks, rate cuts are in progress and deregulation is on its way as is a relaxation of antitrust activism. Add to that falling inflation and the promise of tax cuts and you can see why the market, which had no horse in the race, cheers.

Fed Chair Jerome Powell made plain at his post-announcement press conference that he’s sticking around until his term expires in 2026. But much about the next year is not so clear. Will unified control of government tempt the Senate to weaken its filibuster rules? And will an Elon Musk-led government efficiency commission really aim to trim $2 trillion from the budget?! If the GOP does take the House, there will be calls to trim or repeal the Inflation Reduction Act. Finally, and crucially: given their potential to reignite inflation, will Trump really push tariffs as far as he indicated on campaign? Back on Main Street, holiday spending is likely to be brisk. Gas prices shouldn’t be an obstacle, as futures suggest they’ll drop close to 20 cents by Christmas. Plus, a wealth effect is likely to open purse strings. As for stocks, Q3 earnings season was good, sentiment has not yet reached the dreaded “exuberance,” and there is no recession on the horizon. Indeed, historically, when enjoying a 12-month rally above 35%, the US has never entered a recession over the succeeding 12 months. “Never” is good odds. Our country is strong, massive, resilient. Exceptional! As this rarest of rare election years ends and we ponder the result, one thing is clear. Groceries trump (if you’ll forgive) whatever other issues there may be.

Positives

• Consumer soars The University of Michigan’s Consumer Sentiment Index jumped to 73, the highest reading in six months and 50% higher than in June 2022. Expectations for personal finances rose 6%. Year-ahead inflation expectations fell to 2.6% from 2.7% although longer-term inflation expectations rose to 3.1% from 3.0% last month.
• Services strong ISM’s services index rose to 56.0 in October against estimates of 53.8. Employment bounced back to 53.0, its best reading since August 2023, with 14 industries growing and just two contracting. New orders dipped slightly to 57.4 but remained in expansionary territory.
• The Fed’s confident The Fed cut rates by a further quarter point at its meeting in the wake of the election. Still, the central bank is in a delicate spot now with expectations that Trump may boost inflation even as core PCE proves sticky. Employment costs have risen lately—fortunately, labor productivity remains strong at 3.5% above the pre-Covid trend.

Negatives

• Needed before housing can recover Mortgage applications declined for the sixth week in a row, falling 10.8% in the week ended November 1 versus a dip of 0.1% the week before. 30-year mortgage rates stand at 6.8% versus 6.1% at the beginning of October.
• Trade deficit grows The US trade deficit swelled by $13.6 billion in September to $84.4 billion. Imports rose by 3% while exports dropped by 1.2%. Exports of consumer goods fell 6.3% while the month saw (pre-tariff?) increases in imports of food and beverages (4.7%) and consumer goods (6%).
• Manufacturing soft Factory orders fell 0.5% in September, matching consensus. Durable goods orders declined 0.7% while nondurable goods orders dropped 0.2%. At least we’re not Germany, where industrial production fell 2.5% m/m in September and is now down 5% on the year.

What Else

A Dallas executive asked me the most common question I get “When will the ballooning debt explode?” The US federal debt has tripled in the last 15 years and currently stands at 99% of GDP, a figure the Congressional Budget Office sees going far higher. The debt/GDP ratio looks set to increase to 116% in 10 years and explode to 166% in 30 years, driven by an aging population and rising interest payments.

Pendulum swings The incumbent party has now lost in three successive presidential elections (2016, 2020, 2024), something that had not happened since the time of Grover Cleveland in the late nineteenth century. Trump and Cleveland are the only presidents ever elected to non-consecutive terms.

Hopefully, that’s where the comparison ends Speaking of Cleveland (a Democrat, incidentally), how did the market fare during his time in office? In his first term, US equities returned 43%. Cleveland’s second term was less auspicious, as the Panic of 1893—the worst US slump before the Great Depression—began two weeks before he was sworn in. Over the course of that term, the cumulative total return on US stocks was -4%.