Weekly Research Briefing: Surely You Jest

"I think that's all a big TBD. I mean, understand there's what is said on the campaign trail and what is actually attempted once you have office and then what can actually be affected given the branches of government and the like. And I think we're just going to have to see how these net out, right?" - TransUnion President, CEO & Director Christopher A. Cartwright

If Wall Street learned one thing during Donald Trump’s first term as president, it’s that the stock market is a way he keeps score. At various points he took credit for equities rallies, urged Americans to buy the dip, and even considered firing Federal Reserve Chairman Jerome Powell, who he blamed for a selloff.

Now he’s preparing for another stint in the White House, and the market is once again a key focus. The problem is he’s also bringing a series of economic policy proposals that many strategists say raise the risk of increasing inflation and slowing growth.

So for investors who’ve enjoyed the S&P 500 Index’s more than 50% jump since the start of 2023, the best hope for keeping the market rolling into 2025 and beyond may be Trump’s fear of doing anything to damage a rally.

“The markets like predictability and stability, and Trump has delivered neither in the last 24 hours,” wrote Greg Valliere, the veteran Washington watcher and chief U.S. policy strategist at AGF Investments, in an email on Thursday. “Is he looking for the best possible people, or does he want to send a message to his rivals? If it’s the latter, we’re in for a long four years.”

"Right now, you have List 301 tariffs that go through List 1 through 3 and 4A that are at 25% today. Those are the ones that are costing us just shy of $100 million today. If those went up to 60%, which is where some of the rhetoric has been, it would add -- that move from 25 points to 60 points would add $200 million of annualized tariff expense. Again, we don't know if that will happen or won't happen. It is certainly one of the quickest things that could happen because it could kind of happen with the stroke of a pen as opposed to a whole new framework needing to be put in place" - Stanley Black & Decker CFO & SVP Patrick D. Hallinan

@SoberLook: US lumber continues to rally amid preemptive purchasing ahead of expected US tariffs.

@StevenTDennis: Eliminating the $7500 EV tax credit would require Republican lawmakers with EV factories in their states and districts to vote to nix it. That is not usually how lawmaking works.

@carlquintanilla.bsky.social: The RFK Jr. impact on Big Pharma has a second-order effect: Big Pharma ad spending (via MS)

“A lot of bankers, they’re like dancing in the street,” Dimon said, regardless of who they voted for after years of a tougher regulatory environment. “Animal spirits will be unleashed” as companies look harder at acquisitions and capital deployment, he said — “and they should.”

"We are seeing the big unlock we've been waiting for on the M&A side. When will clients become more active in the $1 to $3 billion acquisition range? Sponsors have been waiting for an unlocking to participate more, and we’re seeing that beginning now. The same applies to the IPO market, with growth of 11%...particularly in the States—which is where the majority of the M&A activity is happening at the moment, and is likely to remain so—it is game on" - Citigroup CEO Jane Fraser

Donald Trump’s election has unleashed big hopes in the market for dealmaking, regulatory easing and private credit. Together, all of that would put some extra shine on Goldman Sachs.

Goldman is the top-performer among global banks in the S&P 500 so far in November, up nearly 15%. That is well above S&P 500 banks, which are up around 9%, and on par with private investment firm Apollo Global Management’s gain this month.

That may be no coincidence. Like other Wall Street banks, Goldman would benefit from an uptick in merger-and-acquisition or initial-public-offering activity, as well as any regulatory rollback. And generally when things are good on Wall Street, they are very good at Goldman: During the surge of activity in 2021, its return on equity for the year was 23%, versus 12% for S&P 500 banks overall.

But Goldman could also be a potential big winner among banks from big growth in private credit and alternative assets—the same hope propelling Apollo’s shares in recent quarters...

Why could private credit be set to benefit in a Trump administration? One reason might be political. New securities or systemic risk regulators might be less inclined to limit the availability of relatively illiquid private-credit investments to everyday investors, or to view it suspiciously as a source of financial risk.

"The economy is not sending any signals that we need to be in a hurry to lower rates. The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully"

"On the inflation data, we do see inflation continuing on the bumpy path I mentioned. Today's reading showed a slightly more upward bump than we had expected, but I would say the broader trend, if you look back over the last 18 months, is still intact... Inflation is running much closer to our 2 percent longer-run goal, but it is not there yet"

- Fed Chair Jerome Powell

@ericwallerstein: Market-based r* now in line with the highest estimate in the SEP

@RenMacLLC: Within the Empire, concerns about inflation: six-month expectations for prices paid & received strengthened. This could be a sign firms are discounting tariffs in 2025. With the economy emerging from a period of high inflation, the Fed may not be as accommodating as it was in 2018–2019.

MORGAN STANLEY: “.. Inflation continues to decelerate as expected until 1Q25, but becomes stickier afterwards. .. We have boosted our [core PCE] forecasts for 2025 from 2.2% to 2.5% on tighter labor markets and further tariffs. Inflation remains above target in 2026, at 2.4%.”

@KevRGordon: Empire Manufacturing Index spiked in November to the highest since December 2021

“Our proprietary survey of ~2,000 US consumers reveals a more positive outlook for holiday shopping versus 2023 and 2022. Overall, 37% of consumers are planning to keep their holiday budgets roughly the same, 35% expect to spend more, and 22% expect to spend less yielding a net of +13%.“ - Morgan Stanley (11/13)

“Consumer sentiment has also shown signs of improvement, and the 2024 Bank of America Holiday Survey suggests people are planning to spend $2,100 outside of typical obligations and necessities this holiday season, up 7% YoY.“- BofA (11/12)

“According to The Conference Board Holiday Spending Survey, the average US consumer intends to spend $1,063 in nominal terms on holiday-related purchases in 2024, up 7.9% from $985 in 2023. This is also higher than in 2022 ($1,006) and 2021 ($1,022). On gifts, consumers plan to spend an average of $677, up 3.4% from $654 last year. After slumping last year, consumers’ budgets for non-gift items such as food, decorations, and wrapping paper are also up 17% at $387.“ - The Conference Board (11/12)

@neilksethi: BofA's bi-weekly Truckload Demand Indicator (shippers' 0- to 3-month freight demand outlook) gets a "Trump Bump" +4% (it was +7% in 2016 (around the arrow) and from there it trended higher over the next yr)) "to 58.3 the highest level since June 2022 (and it had been below 56.5 for 61 of prior 63 surveys).

"If you think about it, public markets do not work the way we think they work. In fact, nothing works the way we think it works. So, I look at public markets today, and I ask really fundamental questions. Like in the US, which is the most developed of the capital markets: do we have price discovery in the short term? I don't think so. Think about what's happened in US markets: 80% of the volume in the S&P 500 is passive; over 60% of the market is passive. Ten stocks make up 39% of the S&P. Four stocks have determined profitability for the last four years. One stock is larger than every public market other than Japan. That's the universe you're going into...It is not about price discovery of an individual security in the short term....The structure of our market has changed. It doesn't mean it's bad; it just means it's indexed and correlated" - Apollo CEO Marc Rowan

For the US equity market, the 12-month forward PE is well above its previous 20-year high and mean. While this is partly explained by the higher valuation of mega cap technology companies, the US equity market is still trading at close to record valuations even if we exclude these companies. Furthermore, the stretched valuation in the US equity market is reflected across most standard valuation metrics, with the median 'absolute valuation metric' in the 97th percentile compared with history.

Trump’s election victory could thaw private equity exit activity, according to Hamilton Lane chairman Hartley Rogers. Rogers told Private Equity International he expects the US election result will create “much more fluidity” in exit markets, driven by IPOs and M&A. “I think you already are seeing a very strong stock market – I believe that will continue.

Trump and his team, this time, have a much clearer idea of how to get things done and what they need to do. I think from an economic standpoint, you’ve got a good environment: lower taxes, less regulation and less friction around.” Rogers’ comments follow a challenging couple of years for exits. Buyout-backed exits fell to $345 billion globally last year, down 44 percent from 2022, according to Bain & Co. The number of exits also dropped 24 percent to 1,067.

“Private equity is an ecosystem that requires all parts of it to be in balance in order to work, and so it can take a while for that to come back and get going, ” Rogers noted. “I’m not predicting radical changes, for example, in fundraising, but I do think you’re going to start to see exits coming now. The IPO part is more a function of market confidence, and I think you’re at a moment now where people have the sense that valuations are perhaps more in a range at which they would feel good exiting.”

The incoming administration may also grant private equity firms a reprieve from antitrust scrutiny led in part by the Federal Trade Commission and its chair, Lina Khan, as well as regulatory uncertainty driven by an ambitious US Securities and Exchange Commission. “The M&A piece has been challenging, largely for regulatory reasons,” said Rogers. “You’ve had a very liberal FTC approach, which is really trying to prevent any consolidation of industries, and there’s been just a dampening effect from that put on to the M&A markets. You’re [now] in a very different environment.

The biggest US private equity firms anticipate that President-elect Donald Trump’s victory could aid their ambitions to capture some of the $11 trillion sitting in defined-contribution plans such as 401(k)s. Alternative asset management firms are likely to push the Trump administration to welcome private, illiquid investments into everyday investors’ retirement accounts, with a key focus on target-date funds, according to people with knowledge of the matter.

Apollo Global Management Inc. Chief Executive Officer Marc Rowan and other proponents of private markets argue that the ability to withdraw money on a daily basis isn’t necessary in long-term retirement accounts. By giving up a little bit of liquidity, or ease of selling assets, investors can reallocate some of their ultra-liquid investments such as stocks into private credit and private equity in exchange for higher returns, proponents argue.

The Trump administration is expected to be far more open to loosening regulations than the Biden administration, which wouldn’t endorse placing private equity investments in 401(k) plans. Private assets offer higher returns and better diversification than public markets, which are dominated by several large firms, proponents of private equity in 401(k)s argue.

‪@jay.bsky.team: Wow another million in a day! Thank you everyone — we’re going to do our best to make this place great for you.‬