A Post-Election Rally, a Market Pullback. What’s Next?

PUBLISHED DECEMBER 2024

For the first time since 2021, the Fed is no longer likely to be the biggest influencer on economic growth, employment, inflation, or interest rates. Starting next month, the new president’s policies, some enacted by executive order and others in conjunction with Congress, will not only provide primary economic growth influence, but will also feed back through the entire economy to positively influence the Fed’s future monetary policy.

While we likely can envision the broad-brush outline of what Donald Trump is thinking, we must wait for details. This is not unusual. Presidents do not show their entire hand before taking office, because doing so gives the opposition time to prepare to disrupt his progress. Still, the picture is likely to come into clearer focus quickly after Jan. 20, in part because this president knows what is required to move quickly on his first 100 days’ agenda. He also has a better understanding of how Washington works this time around, and enters office with more confidence, more know-how, and a stronger backing in Congress than he had in his first term.

Trump’s reform agenda will be influenced by Elon Musk and Vivek Ramaswamy at the Department of Government Efficiency. DOGE has an expiration date of July 4, 2026—a nod to the department’s urgent mission of shrinking the bureaucracy, not grow-ing it. Trump established DOGE outside the regular structure of the executive branch. DOGE plans to pursue reform in two ways: cutting government employment and cutting government spending, while also streamlining government agencies and reducing and simplifying federal regulation. These will be DOGE’s initial priorities, but Trump may add others as his team progresses.

A cornerstone of Trump’s tax plan is preserving the tax cuts passed in 2017. While this will affect CBO out-year budget forecasts, leaving tax rates where they are now should not change the current deficit trajectory. A proposed additional corporate tax cut may have little impact for two reasons: First, corporate taxes are still only a small fraction of total Treasury revenue; and second, because we are still likely losing revenue that is not being repatriated from overseas.

Judging from coverage by the financial press, especially the television press, tariffs are the only Trump proposal now worth talking about. The media pundit class is convinced that tariffs are inflationary. The likely inflation impact is more complicated, making tariffs one of the biggest unknowns in the outlook. Yes, higher tariffs are bound to follow. When you elect a president who insists that “tariff” is his favorite word in the dictionary, you will get more tariffs. But their breadth and impact remain to be seen.

Trump has proposed closing the borders. He has proposed mass deportations. But he has also proposed immigration reform to allow millions of documented guest workers entry to the U.S. every year. Almost all the public discussion around Trump’s proposed immigration policy understandably centers on human and social consequences. Nevertheless, there is no denying mass undocumented immigration has had enormous economic consequences, and especially negative security consequences, since 2022. Controlling our borders will likely have a big positive impact in the long-term.

The November payroll report produced a Goldilocks number for those hoping for a December rate cut (solid, but not enough to derail the Fed’s easing path). The odds of a quarter-point cut recently rose to 86 percent in the betting markets. Wall Street’s reaction has been positive and is propelled by strengthened expectations for the interest rate cut by the Federal Reserve at its final monetary policy committee meeting of the year later this month.

Sorting out the impact of a change in administrations, opportunities emerge. When it became clear that Donald Trump had won the race for the White House, and the GOP won the Senate (and later the House), the Dow Jones Industrial Average moved higher by 2,250 points (+5.3 percent), the S&P 500 by 240 points (+4.2 percent), the NASDAQ by 960 points (+5.3 percent) and the Russell 2000 by 180 points (+8.0 percent).

To call that just a “Trump bump” seemed like an understatement. For Wall Street, the immediate message was pro-business, lower taxes, energy independence and a more favorable regulatory environment. Large flows of money into equities left a huge technical air pocket underneath the market and true to form, that air pocket was filled.  

Quickly, amid violent sector rotation, the winners and losers from the forthcoming Trump administration and GOP majority in Congress crystallized in subsequent trading sessions, with DOGE getting most of the attention. 

So, what really does lie ahead? One can argue that the recent switching and selling is “the pause that refreshes” before the next rally begins. Nearly every leading stock that enjoyed a straight-up move after the election was already technically very overbought on a short-term basis. Chasing event-driven momentum is typically a bad strategy, but those who booked profits did quite well.

I believe that those who have a lot of cash on hand are in an excellent position to buy great stocks during a volatile market pullback as we enter what is seasonally the best time of the year for stock-market performance.