Weekly Research Briefing: Surely You Jest

November 19, 2024
  • SHARE

With President Trump's election honeymoon over, we now get to see if what was said on the campaign trail stays there or if it will actually be implemented. The incoming President wasted no time last week in testing his mandate by announcing several controversial cabinet nominees and tweeting multiple potential policy ideas. So now begins the test of how far he will push his campaign agenda before Congress and the financial markets reel him back in. Many Wall Street supporters believe that campaign promises were mostly just talk and the tariffs, immigration, and industry specific attacks will be minor. But you know that some members of Congress and Wall Street are wondering if some of last week's announcements were actual or just written by The Onion. Expect eight more weeks of this and don't think that anyone has a handle on anything happening behind the scenes of Mar-a-Lago or on Air Trump. Only one person knows the answer.

The CPI posted a +2.6% gain last week which was in line with expectations along with internals to interest both the inflation doves and hawks. Fed speak following the number seemed to give props to the strong economy while suggesting that they are in no need to hurry in cutting rates. Bond investors remain torn on next month's FOMC meeting actions with about 60% seeing a cut and 40% not. In other words, the upcoming holiday shopping data might be the goldmine for economists. On deck this week are the reported earnings of the world's largest company, NVIDIA, along with those of big retailers Wal-Mart, Target and Lowes. Also, a clipboard of housing data along with the Philly Fed manufacturing index.


Volatility loves uncertainty...

"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

The Transcript


But as we learned during his first term, President Trump does pay close attention to the stock market...

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.

Bloomberg


Fingers crossed that a rational, experienced, fact-based team gets appointed...

“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.”

Barron's


While I believe that he will choose the stock market, if you run a manufacturing business, you need to plan for max tariffs...


For Stanley Works, the move in China tariffs will add $200 million in expenses which could happen at the stroke of a pen...

"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

The Transcript


Pre-tariff buying can be seen in the rising price of lumber...

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


Also talk of an end to EV tax credits last week. Put that one in the doubtful column...

@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.


The top market moving item last week was the nomination of Mr. Kennedy Jr. as the head of Health and Human Services...

The smart money on Wall Street had been hedging their healthcare exposures once a President Trump victory looked certain. But last week's news punished pharmaceutical and biotech stocks while also ending healthcare stock's green light. Safe to say that healthcare companies will be much more difficult to analyze if the HHS gets turned inside out and science takes a backseat.

StockCharts.com


Also thrown into the stock dumpster were advertising stocks because of their work tied to the drug industry...

StockCharts.com


If you weren't aware from all the ads, pharma ad spending on TV is now a $6.5 billion industry...

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


And in other plans, the D.O.G.E. is looking to cut $2 trillion from a $6 trillion federal budget...

If you aren't going to touch Social Security and Medicare, then no way that the defense industry survives the cuts which the biggest stocks realized last week.

StockCharts.com


As for the smaller government contractors, it was a bloodbath...

StockCharts.com


Financial stocks avoided the new administration potholes last week...

The industry continues to be a favorite for investors as they bet on lower regulation, rising M&A and higher capital markets activity.

StockCharts.com


J.P. Morgan's CEO, Jamie Dimon, gave the industry a shout out last week...

“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.”

Bloomberg


As did Citigroup's CEO, Jane Fraser...

"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

The Transcript


But don't just take their words for it. Pull up a price chart of Goldman Sachs to tell you where the news flow is headed for the sector...

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.

WSJ


Now if only the bond market would stop its worrying...

Economic strength + lower taxes/higher deficits + tariffs is beginning to push the 10-year yield out of its range. Let's hope it settles back in towards the 4% level or all of those homebuilders and purchasing managers may not be so optimistic.

StockCharts.com


Some important tidbits from the Fed Chair's speech after the CPI release last week...

"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

The Transcript


The bond market is now betting that the FOMC dots need to begin moving higher...

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


Last week's New York State manufacturing survey showed that they expect to pay and receive higher prices in the future...

@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.


And top Wall Street forecasters begin to lift inflation pictures for future tariffs...

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%.”

@carlquintanilla.bsky.social


Speaking of the New York State manufacturing index, the respondents are now very excited...

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


For your column of near-term economic strength: Americans plan to spend more on holiday shopping this year than they did last year...

“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)

TKer


Confirming some of the holiday excitement could be this near-term transportation series...

@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).


Within the financial markets, global equities continue to be dominated by a handful of U.S. companies... 

Goldman Sachs


One potential Treasury Secretary has strong thoughts on the passive concentration in equities...

"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

The Transcript


U.S. stocks are very fairly valued by historical standards...

This does not mean that they are destined to go down. But if a shoe were to drop, it could get ugly. To keep the performance train moving forward, we need continued earnings growth, a stable interest rate environment and a healthy credit market.

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.

Goldman Sachs


Here is an updated look at the three main Russell index valuations...

The R3k basically accounts for the entire U.S. stock market. The R2k are the small caps and the R1k are the large caps. I have backed out the financial and real estate sectors from this study so that I can zero in on total cap to EBITDA. And all the numbers are trailing data through last week since most small cap companies do not have earnings forecasts.

Something for everyone in this data, but here is what I see:

  • The R2k index is still tough to use in aggregate as a valuation benchmark comparison given that over 1/2 of the companies and 1/3 of the market cap is unprofitable right now.
  • Focusing only on profitable companies in the R2k shows a 10.9x EV/EBITDA valuation. Plenty of slow growing, closely controlled companies in this group, but larger public companies and private company general partners should continue to have a good time removing decent companies from the market at low valuations.
  • With the R1k trading at 18-19x EV/EBITDA, their balance sheets sparkling, the credit markets at legendary levels, a new regulatory regime about to enter office, and a bottleneck of public and private companies waiting to transact, 2025 could become one of the biggest M&A years on record. Once again, pull up a chart of GS.

Bloomberg


I could not agree more with my Hamilton Lane executive co-chairman...

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.

PEI


The table is being set for defined contribution plans to allocate into the private markets...

Evergreen funds could be an incredibly easy vehicle for them to enter with as the gates open.

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.

Bloomberg


Not many companies growing their user base at a 5% daily rate...

‪@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.‬


And an announcement...

Please join me along with Hamilton Lane’s Executive Co-Chairman Mario Giannini and Steve Brennan, Head of Private Wealth Solutions for a webinar we are hosting on December 5th to go over the 2025 Private Markets Outlook and Public Market Implications. We plan to make it a lively discussion, one not to be missed. Register here for the webinar: https://hla.pe/4eEfFhE


Learn more about the Hamilton Lane Strategies

Learn more




DISCLOSURES

The author has current equity ownership in: J.P. Morgan & Chase Co. Inc.

The information presented here is for informational purposes only, and this document is not to be construed as an offer to sell, or the solicitation of an offer to buy, securities. Some investments are not suitable for all investors, and there can be no assurance that any investment strategy will be successful. The hyperlinks included in this message provide direct access to other Internet resources, including Web sites. While we believe this information to be from reliable sources, Hamilton Lane is not responsible for the accuracy or content of information contained in these sites. Although we make every effort to ensure these links are accurate, up to date and relevant, we cannot take responsibility for pages maintained by external providers. The views expressed by these external providers on their own Web pages or on external sites they link to are not necessarily those of Hamilton Lane.

Recent Content

Insights

Weekly Research Briefing: Holiday Marriages

Nothing better than a year end wedding. Holiday decorations, large gatherings and very festive moods. From looking at the news tape this weekend, the mergers continue to extend into the corporate space.

Read the Research Article
Insights

Weekly Research Briefing: 'Tis the Season

For the second straight month, the core PCE inflation data came in a bit warmer than expected. The Fed's Waller said on Monday that he still supports a December cut, but if other FOMC members wanted to begin wavering about future cuts, now could be a good time.

Read the Research Article
News | 2 Min Read

Global Private Assets Fund Wins CHFA Award

Hamilton Lane announced that its Global Private Assets Fund was awarded first place for three-year returns among private equity offerings in Canada by CHFA.

Read the Press Release

We use cookies to improve user experience, and analyze web traffic. For those reasons, we may share your site usage with our analytics partners.

Learn More