A Random Walk Through the Election

November 18, 2024

One of the best books on investing is A Random Walk Down Wall Street, written by Princeton economist Burton Malkiel.  First published in 1973, Malkiel shows that stock prices exhibit random patterns over the long term and, following, different active management styles all tend to converge toward the mean.  Markets tend to ‘self-correct’ over time.

This broad concept can be applied to the political/economic /market environments today.  

How Quickly Will Policy Changes be Felt?

The elections were quickly declared a ‘mandate for change’ and changes we will see.  But while the near term will be dominated by ‘shock and awe’ pronouncements and their expected impacts, the implementation and consequences of new policies will likely be slower and shallower than many expect.  The pendulum will swing to the right, but effects will take time to unfold. 

Tariffs

How much of any tariff charges will be absorbed by the countries of origin? Not all will be passed on to American buyer.  While the final number is ours to decide, there will be negotiations to minimize the impact on American consumers and maximize the benefits to American producers.

Taxes

Extension of the existing tax structure, plus new exemptions for tips, Social Security, and overtime income, and changes in the SALT (State And Local Tax) exemption limits, will reduce Federal revenues.  Rarely mentioned, however, is any offsetting benefit of higher consumer spending – and thus economic activity – from a lower tax burden.

In short, pro-growth, U.S.-centered policies – as they always have – should produce a better economic environment for American producers and consumers.  Benefits to the Federal coffers will follow.  It won’t be an overnight event, but it will occur.  Perhaps this random walk will be more direct – and beneficial – than many now think.

Other Market Impacting Insights

A few other market-related points:

• Small company stocks (the Russell 2000) have outperformed large capitalization sectors (the S&P 500) in the year following six of the last ten presidential elections.  We expect this pattern to repeat, particularly given an emphasis on policies helping U.S.-based manufacturers.
• Conversely, international stocks may fall further out of favor with a stronger dollar and greater emphasis on domestic production.  While much of this is already reflected in non-U.S. multiples and yields, a closing of this valuation gap will likely be delayed.
• One of the more exciting prospects is in energy production.  As the new Administration encourages domestic production – in an environmentally-conscious manner – the probable outcome of new jobs and lower energy prices will be positive across the board.  Energy stocks should benefit.
• Interest rates remain problematic.  The Federal deficit is approaching $2.0 trillion per year, with many future costs already committed.  While the Federal Reserve will continue to reduce short term interest rates, the longer end of the yield curve will remain elevated.  This presents a challenge to radical changes in tax policy.  While changes will occur, the pace will be incremental until the benefits of new pro-growth are fully felt. 

In all, we’re excited about the opportunities ahead while remaining aware that it’s our job to protect clients from the ‘unknown unknowns’.  Please talk to your Advisor and Investment Manager about how we can help you navigate the years ahead.  Your success matters to us!