2024 | November Risk Odometer
Our Risk Odometer remained at +3 with a Positive Outlook for November, consistent in its score and outlook since February of this year. The coming and passing of the presidential election earlier this month did not have an impact on the net score or Current Outlook. Although the election did impact markets and specific sectors, the Risk Odometer takes a broader approach. This broader approach remains consistently positive.
Given the recent consistency of the Risk Odometer coupled with the rarity and divisiveness of the recent presidential election, we wanted to share our opinions on how the election may impact markets going forward. Our most basic opinion is the Donald Trump victory should usher in pro-economic growth policies, which we view as a positive development for the US stock market. It was not surprising that news of his victory initially catapulted all sectors of the US stock market higher. We expect his pro-growth policies to be a tailwind for the stock market over the next four years.
The biggest tailwind Trump brings is lower taxes. We do not envision taxes going significantly lower but the expiration of his tax cuts, which were due to expire in 2025, may be delayed. Republicans gaining decisive control of the Senate and maintaining control of Congress are instrumental in that agenda. In our opinion, the tax cuts were the biggest reason the stock market performed so well during Trump’s first term.
The next biggest tailwind Trump brings is deregulation. We believe this should benefit smaller companies and banks. Deregulation often comes in the form of less compliance and less restrictions on mergers and acquisitions. This positive development should benefit smaller companies who have lower budgets and staff to handle complex compliance hurdles and banks which earn high margin revenues from mergers and acquisitions.
Lastly Trump’s popular “America first” agenda should benefit smaller American producers relative to overseas producers or large globally integrated US companies. This agenda is another reason smaller companies may benefit from Trump’s policies.
On the concerns of the Trump victory, we envision greater deficits. Neither in his first term or his history in the private sector, was Trump fiscally conservative. He campaigned on many budget-expanding ideas and is known for following through on campaign promises. Given the already high amounts of government debt, interest rates may rise to compensate investors for lack of fiscal restraint.
The lack of fiscal restraint and tariffs may also stoke inflation. We do not envision the sharp rise in inflation we saw in 2022, but we could envision inflation remaining sticky at current above target levels, or worse, drift higher. This creates the importance of having inflation hedges such as materials and physical commodities in a portfolio.
Lastly, the unconventional nature Trump brings to the White House stresses the importance of diversification in portfolios. We believe Trump will be more divisive in his second term. His appointees and advisors will be more “yes” people rather than critical thinkers, giving him more freedom to govern in an unconventional nature. This may create uncertainty, resulting in and winners and losers which are harder to identify in advance compared to environments governed by more conventional presidents. Diversification is our best solution for harder to identify winners and losers.
Overall, we envision a Trump victory as a net positive for the stock market given pro-growth economic policies and lower taxes. We envision our Risk Odometer remaining positive for the near future as positive sentiment builds for the presidential transition and he implements his pro-growth policies.
Nevertheless, a rules-based approach is at our core. It keeps us disciplined and removes emotions for the decision-making process, key components to successful investing. We will defer to our rules-based approach as new information materializes.
As always, we continue to believe our Risk Odometer provides guidance in making better investment decisions because it keeps us objective and disciplined. We use this methodology and advise our clients to do the same. Emotions are our enemies in investing.
It is important to understand that our Risk Odometer is not designed to anticipate small to medium corrections, typically those in the 5-15% range. Instead, it monitors for conditions which have typically preceded larger corrections. We believe trying to anticipate small to medium corrections sounds attractive but more often results in lost opportunity than savings.
The Equity Market Risk Odometer is our guide for judging risk in the equity market. It is used as a guide for investment decisions in our proprietary investment strategies. It is composed of various indicators based on leading economic indicators, earnings, technical price action, breadth, and volatility. Its score can range from +5 to -5. Readings greater than one are positive and readings less than or equal to zero are negative.