Defensive Stocks are So Yesterday — Evening Brief – 11.18.24

As markets process Donald Trump’s return to the White House, the primary concern is the potential impact on equities. Communications services, as measured by the iShares Global Comm Services ETF (IXP), and financials, as measured by the iShares U.S. Financial Services ETF (IYG), for example, have experienced a significant increase in prices. Currently, they are virtually tied as the top-performing sectors year-to-date. Meanwhile, the rush into defensive sectors such as utilities, iShares U.S. Utilities ETF (IDU), has reversed dramatically in the last week.

Ark Invest CEO and CIO Cathie Wood wrote on X last week, “Deregulation (defanging the SEC, FTC, and others), government spending cuts (making room for the private sector), tax cuts, and a focus on technologically enabled innovation are likely to turbocharge the U.S. economy more powerfully than during the Reagan revolution.”

The rotation in equity leadership appears to support the bullish pattern. The IXP, which includes consumer-driven companies such as Meta, Alphabet, and Netflix, has recently gapped higher and is currently up 34.2% this year, trailing only IYG and significantly outperforming the broad market iShares Core S&P 500 ETF (IVV) and IDU.

“We’re just seeing a more pro-business administration coming in that undoubtedly will cut taxes,” Yardeni Research president Ed Yardeni told Yahoo Finance. “And not only for corporations but also for individuals. Lots of various kinds of tax cuts have been discussed. In addition to that, a lot of deregulation.” Yardeni predicts the S&P 500 Index will increase by more than 65% by the end of the decade.

What could upset the applecart? Fiscal and inflationary headwinds are likely to stymie, if not derail, some of Trump’s policy initiatives. The concern is that tax reductions and other policy initiatives endorsed by Trump—such as increasing tariffs and deporting millions of immigrant workers—could exacerbate inflation.

Throw in the escalating apprehensions regarding the U.S. government’s expanding budget deficit, it is reasonable to assert that Trump and the Republicans have a challenging trajectory next year concerning the bond market’s response, which is increasingly wary of inflation and fiscal risk.

“The stock market loved the election outcome,” said David Kotok, co-founder and CIO at investment management firm Cumberland Advisors. “But there is nervousness in the bond market. It’s more worried about the size of deficits and the possibility of inflationary tariffs.”

Another possible risk for the market is the politicization of monetary policy as Trump asserts, he should exert some control over the Federal Reserve. “I think I have the right to say, ‘I think you should go up or down a little bit [for interest rates],’” he said at the Chicago Economic Club last month. “I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether or not the interest rates should go up or down.”

For the moment, the stock market is paying little if any attention to the recent ominous rise in U.S. Treasury yields. The 10-year yield has rallied 80 basis points since the middle of September to 4.42% as of Monday; its highest level since early July.