Leeward Investment Team

Markets rallied last week following the conclusion of the Presidential Election, reaching new highs even as Treasury yields rose on renewed inflationary concerns. Rallies following close elections have been the historical norm, but the current one is faster than prior upticks. The source of strength has little to do with the policies of the winning party but instead with the economy remaining remarkably resilient.

A strong economy is counterintuitive to many Americans because costs continue to rise. High food prices, rising rents, and higher mortgages have sharply cut consumers' disposable income. Many Americans feel worse off than they did four years ago. Still, corporate America is strong, particularly in technology and communication services, where AI demand has pushed earnings growth well above 20%. Additionally, rate cuts remain in place, with the Fed cutting rates by 0.25% just after the election, and another 0.25% rate cut is more likely than not during the December meeting. Net-net, the U.S. economy will grow close to 3.0% this year and is expected to grow 2.5% in 2025. These are very positive numbers for the U.S. economy at this point in the economic cycle.

It is still too early to determine how fiscal policy might impact markets; however, "reflation" seems to be the word of the day. The extension of 2017 tax cuts, incremental tax cuts, and continued deficit spending should be good for growth but will add inflationary pressure. Broad-based tariffs will stimulate domestic production but will also raise prices. Reduced regulatory oversight will increase merger and acquisition activity (M&A), stimulating investment. All of these activities are supportive of growth, but also push prices higher.

Equities will continue to do well in this environment in the near-term. Lower taxes (or lack of increased taxes) are supportive of growth. Technology, Financials, and Industrials are all sectors that benefit from a reflationary, pro-growth environment. Conversely, Consumer Discretionary, Utilities, and Staples won't find as much favor. Small-cap companies will benefit from rate cuts and increased M&A, while international equities will experience headwinds due to tariff policy and a stronger U.S. dollar.

Longer-term risks are rising, with deficit spending and inflation posing threats to market stability. Fiscal policy and the Fed's response to inflation will be key next year. For now, historical trends, strong economic data, and post-election clarity support the current rally.

We hope you are enjoying the holiday season and are happy to discuss any questions you have.

Sincerely,

Leeward Investment Partners