Market Observations
Trump's New Economy
Hello and welcome back. At the time you are reading this, I will be on mile six of the Indianapolis half marathon, maybe say a prayer before continuing. Thank you.
This week started off with the presidential election taking place on Tuesday, in which Donald Trump dominated before the night was even over. Below is the final map showing the key swing states including, but not limited to, North Carolina, Michigan, and Pennsylvania falling to Trump.
(S&P 500 up 4% this week off Trump election victory)
I am strictly discussing the effect on markets in this newsletter, I do not mean to come across politically motivated. If you have followed along, you have heard some of my frustration with both candidates regarding their discourse and persuasive language. I think we are in a crisis of critical thinking, therefore politicians are incentivized to use headlines and emotionally stirring images over thoughtful discussions and ideas. (check out “Amusing Ourselves to Death” by Neil Postman)
What Now
The question everyone is asking now is, what does this mean for the economy? On the surface, most assumed a Trump victory automatically meant a better economy, and maybe that IS what we should assume. Policies around energy, tax cuts, and loose banking regulations are policies that create a better environment for deal flow and liquidity than the proposals from Kamala Harris around tax increases, stricter banking regulations, and less M&A (and grocery store price caps?)
Although Trump’s policies support economic growth, the forces of inflation and the question of national debt are becoming increasingly heavier. As you can see in the hyper link the interest payments on the debt are almost to $1 trillion. For reference our national debt is $33 trillion while US GDP is $29 trillion. This results in a Debt to GDP ratio of about 123%. For further reference, the national debt per citizen is $76,021 while median income is $40,000.
I don’t say this to keep you away from the markets, I only bring this up as a continued reminder that government deficit spending should be a discussion we are having. To see how nations crumble under debt/spending see this book. Bitcoin is up over 100% this year as many start to think about other options due to the lack of clarity on handling $33 trillion in debt.
Federal Reserve Rate Decision
The Fed cut a quarter point on Thursday, following a half point cut in September. The Fed funds target rate is now 4.5-4.75%. As a reminder, this rate is the rate at which banks and other institutions lend to each other to meet different obligations, or to then lend out at a higher spread. For example, a loan for a business is used to buy equipment, make more sales, and grow. The interest rate on the loan is determined by the bank by deciding how much they could make RISK-FREE if investing at the Fed. If they can make 4.5% with no risk, they would lend to your risky business with a spread, of say 2.50%, which would add up to a 7% rate on your loan.
Knowing this, when the Fed raises rates it is meant to counteract growth at an unsustainable pace. For example, rates go to 5.5% + 2.5% (spread) then you have an 8% interest rate, you may not be able to afford the loan, therefore the business doesn’t grow immediately. This is used when inflation is running up.
When economic growth and inflation slow down, the Fed will then cut rates down, making it cheaper to lend money. More businesses borrow and grow and the machine starts turning again.
On Thursday, Powell mentioned our economy is solid, and the job market is softening although secure for now. He purposefully did not give much forward guidance because he wants to make interest rate decisions based on the data that comes in. It is both good and bad that the Fed is data dependent. On the positive side they theoretically should stay infront of any disasters that arise by looking at all the data that comes in. The negative side is the data can be slow to gather, inaccurate, and not all encompassing.
Nobody can predict interest rates, not even the Fed themselves. I don’t believe anyone should make investing decisions based off the Fed either. As to where I am investing, my strategy does not change president to president or off rate decisions. I want to continue to invest in the overall market and businesses that pay out their earnings in the form of dividends, who continue to grow their dividend year over year. A company like V 0.00%↑ . I may add more money as markets go down and less money as markets go up, but not selling everything to wait for pull-backs.
Thank you for reading this week, I am interested to see Trump’s policies regarding tariffs and taxes as well as potential inflation resurgence. I am also interested to see Bob Kennedy’s approach to the FDA, and Elon’s approach to slashing government inefficiencies. Hopeful to write on these in the near future.
Is mainstream media still competitive?
Tampa Bay Lightning hockey owner to share profits in the sale of the team.