Three Things (11/8)

What the Fed said

Easy does it … On Thursday, the Federal Reserve announced a second consecutive interest rate cut, lowering its benchmark rate by a quarter point to a target range of 4.50%-4.75%. This latest reduction reflects a more cautious approach compared to earlier, larger cuts, as the Fed works to adjust its monetary policy gradually. Markets had expected the move, and this time all Fed governors—including previous dissenter Michelle Bowman—were on board.

Back in September, the Fed made its first rate cut (50 bps) after several hikes aimed at controlling post-pandemic inflation. The November cut follows economic data signaling that inflation is cooling (lowest pace since January 2021) and the job market, while resilient, is a bit messy at the moment.

With a new incoming administration, Powell’s announcement came at a time of heightened attention from the president-elect. The Federal Reserve works independently from the executive branch, so it doesn’t need approval for decisions like setting interest rates. Presidents can shape the Fed a bit by appointing leaders—like when Trump picked Powell in 2017—but once in, the chair isn’t expected to follow the president’s agenda. In 2018, for example, Trump criticized Powell for raising rates, which shows how tensions can pop up, but the Fed’s job is to stick to economic facts, not politics.

What does it all mean?

The business angle … With a confirmed second term for Donald Trump, analysts are prognosticating over potential shifts in the economy—which ended up being the No. 1 issue for many voters this cycle, ahead of preserving democracy. From trade to tech, his return to office could cause shakeups across the market.

Trade War with China 

A Trump 2.0 administration could revive trade tensions with China. Potentially steep tariffs—up to 60% on Chinese imports—might inflate U.S. prices and stoke a new phase in the trade war. Chinese exporters are bracing for impact, front-loading shipments to dodge tariffs while the U.S. contends with higher import costs. Steve Madden’s CEO says they will reduce China imports by 45% next year. China is the cheapest place to manufacture products, so who will make up the margin? 

Global Impact Beyond China  

Trump’s tariff-heavy approach could stretch beyond China. European economies, particularly Germany, might feel the pinch, as trade flows slow and consumer prices rise. Economists fear that Europe could lose out in a reshaped global economy, with one saying that it could become “the biggest [economic] loser of the Trump era.”

Energy Impact

Analysts expect a fossil fuel surge. Trump’s pro-oil stance aims to increase offshore drilling and fast-track energy projects. Clean energy may see cuts in subsidies, which could stunt renewables’ growth. Analysts note that many climate policies are determined at the state level, which could help mitigate risk. Still, climate tech stocks are taking a beating.

Crypto Impact

Trump's relatively recent support for crypto has ignited optimism, despite comments made in 2019 that he’s “not a fan of bitcoin.” He’s since changed his tune. Post-Election, Bitcoin (BTC) surged to a new all-time high, fueled by investor hopes for deregulation. Trump’s light regulatory approach could stand to benefit crypto exchanges like Coinbase (COIN) and Robinhood (RH), which have already seen double-digit gains this week.

Housing Market Impact

Trump’s proposed regulatory cuts and use of federal lands for housing could lower costs, but experts question their actual effect given most demand is not near federal lands. Concerns about rising mortgage rates and possible labor shortages due to the planned mass deportation of immigrants also cast doubt on quick improvements in housing affordability.

Bottom line: Across a diversified portfolio, history shows that stock market returns remain steady, no matter which party holds the White House. While there will certainly be near-term impacts and secular trends, on the whole, the markets are apolitical.

Data points to IPO pop in 2025

Going public  … Will 2025 usher in a flurry of public listings? Ernst & Young (EY) looked at historical data and found that IPO activity in the U.S. increases by 39% on average in post-election years as compared to election years. Of course, as is the case with any investing concept, past performance does not guarantee future results.

Per Renaissance Capital, there have been 128 IPOs priced so far in 2024, reflecting a 33% increase YoY. More than 40% of priced IPOs have come from the Industrials sector.

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