November 2024 will go down as one of the best months for American financial markets, with historic increases in stock indexes, backed by stable economic fundamentals and political optimism. The S&P 500 index rose by 5.73% month-on-month, marking a 26.5% increase since the start of the year. The Dow Jones Industrial Average surpassed the 45,000-point level, recording the best month of the year with a result of 7.1%, while the Nasdaq Composite gained 6.1% in November.
The dynamic growth was driven by announcements of deregulation, tax cuts, and generally investment-friendly policies of the newly elected Donald Trump administration. The “America First” policy reduced market uncertainty, leading to a larger inflow of capital. In addition, the yields of Treasury bonds fell, which reduced the cost of financing, increased the attractiveness of stocks, and supported further growth of valuations.
However, this optimism is not devoid of threats. Economic growth in the US, albeit solid, is balanced by inflation growth. In October 2024, the consumer price index (PCE), preferred by the Fed as an inflation indicator, increased by 0.2% on a monthly basis, maintaining the pace from September. The annual inflation rate reached 2.3%, moving away from the Fed’s target inflation level of 2%. Moreover, core inflation, which excludes volatile food and energy, rose by 0.3% in October, raising the annual rate to 2.8%. This was the first rise in core inflation since June, raising concerns that the Fed may hold back more aggressive easing of monetary policy.
Fed decisions on interest rates remain a key factor shaping the future of markets. Since September, the central bank has lowered rates by 75 basis points, and another reduction of 25 basis points is expected in December. Despite this, a higher inflation level, especially core, complicates the situation. The Fed must maintain a balance between supporting the economy and preventing further price increases. The lack of clarity on the neutral interest rate – that is, a rate that neither stimulates nor restrains the economy – further complicates decision-making.
Other risks are also appearing on the horizon. The new Trump administration announces the possibility of introducing tariffs, which could hit income for firms with significant international exposure, such as Nvidia, Apple, or Amazon. Moreover, plans to limit immigration may have a negative impact on the labor supply, slowing economic growth. Unpredictable political decisions, such as threats to impose 25% tariffs on goods from Canada and Mexico, can increase market volatility, which would discourage investors from taking greater risks.
An additional challenge for investors is the upcoming labor market data, which is crucial for the Fed’s further decisions. The report on the number of new jobs for November 2024, expected in early December, could significantly affect monetary policy. Investors expect moderately positive results – too good data could slow down the rate cut cycle, which would negatively affect stock valuations by increasing the cost of capital.
Author: Krzysztof Kamiński, Oanda TMS Brokers
Source: https://ceo.com.pl/historyczne-wzrosty-na-amerykanskich-gieldach-w-listopadzie-2024-r-83750
