Election Impact

Now that Donald Trump has won the election and the Senate has flipped back to the Republicans, until actual policy is put in place, investor perception of that future policy will move the markets more than anything.

 

The Disconnect:

Trump has promised to cut federal spending, reduce the national debt, cut taxes, and reduce inflation.  All these actions will be positive for mortgage rates going forward.  Except, Trump’s first term as President saw spending increase and the debt grow larger.  Investors believe Trump’s second term will bring more spending, higher deficits, and continued inflation.  Until that perception is changed, mortgage rates will continue to stay at elevated levels.

 

The reaction to Trump’s victory by the big Wall Street investors signaled their confidence that the new administration will ramp up the economy.  The stock markets saw an influx of cash starting Wednesday and pushed all the indices higher.  Investors buy stocks when they believe their price will rise.  Stock prices generally rise during robust economic times.

 

As I wrote about last week, investors work from an investment triangle.  You only have three choices of where to put your money - Stocks, Bonds, or Cash.  Investors do balance their portfolios to manage risk, but they will move money between the three investment options to maximize returns.

 

With a ton of money moving into the stock market this past week, bonds were ignored – despite the high interest rates offered.  The difficulty with US Treasury bonds, unlike stocks, is so long as the government keeps spending more than we bring in by way of taxes, additional bonds are created that need to be purchased by investors.  The supply keeps coming!  And using the laws of supply and demand, if there is more supply than demand, the seller of that item must entice the buyer to buy.  With bonds, the way to get people to buy them is by offering a higher interest rate on that bond.

 

If Trump can make good on his promises, we’ll see a robust economy with low inflation.  But that possibility can’t become a reality until after he’s in office, and that’s roughly 70 days away.  Trump has touted that Elon Musk can reduce $2-trillion from the federal budget just getting rid of waste – not eliminating jobs.  I believe our government probably wastes that amount each year.  The hard part will be finding it and eliminating.  But if that can happen, along with higher tax receipts from a strong economy, we could be in for some good years ahead – and what American, Democrat or Republican wouldn’t want that?

 

 

 

 

 

And now the week’s economic news…….

 

Fed Cuts Another ¼ Point

The last Fed meeting on September 18 was the most highly anticipated in a long time due to the rare uncertainty about the size of the rate cut.  The meeting on Thursday was viewed as the opposite extreme with little doubt about the outcome or much chance of surprising comments.  As expected, the Fed reduced the federal funds rate by 25 basis points to a target range of 4.50% to 4.75%, and the changes to the meeting statement were relatively minor.  According to the statement, the risks to achieving the employment and inflation goals are "roughly in balance."  With inflation easing back down closer to the Fed's 2.0% target and the labor market softening, officials intend to gradually reduce the federal funds rate from restrictive to more neutral levels.  Most investors anticipate that the Fed will cut rates by another 25 basis points at the next meeting on December 18.

 

As a reminder, it is important to distinguish between short-term and long-term interest rates to understand the impact of Fed monetary policy changes on mortgage rates.  The Fed controls the federal funds rate, which is essentially the shortest-term lending rate for banks.  By contrast, mortgage rates are correlated with long-term interest rates, which are determined by many factors such as the outlook for economic growth and inflation years in the future.  As a result, anticipated changes in the federal funds rate such as the one which took place on Thursday rarely have much impact on mortgage rates, as they have already been priced in.  Generally, only unexpected changes in the outlook for monetary policy cause a large reaction.

 

 

The most significant economic report released this week, from the Institute of Supply Management, revealed unexpected strength.  The ISM national services sector index rose to 56.0, well above the consensus forecast of 53.7 and the highest level since April 2022.  Because readings above 50 indicate an expansion in the sector and below 50 a contraction, this report indicates that consumer demand for services remains resilient despite higher prices.

 

 

 

 

 

 

 

 

 

 

Next Week

Investors will continue to look for additional guidance from Fed officials on their plans regarding future monetary policy.  For economic reports, the main event will be CPI on Wednesday.  The Consumer Price Index (CPI) is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.  The Producer Price Index (PPI), another inflation indicator, will come out on Thursday.  Retail Sales will be released on Friday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.

 

 

 

 

 

Until next week….