Wentz Weekly: Trump’s Cabinet Begins to Take Shape

Wentz Weekly Insights
Stocks Fall as Post-Election Rally Fades, Trump’s Cabinet Beginning to Take Shape

Stocks gave up some of the gains they saw from the week prior in the strong post-election rally. It was the third weekly decline of the past four, however stocks still up just slightly over that period. Markets had more of a defensive tone for the week as the momentum from the election faded. The value-oriented Dow index fell just 1.24% while small caps underperformed last week, falling 4% and giving up half of the gain seen from the week prior.

There were several moving pieces over the past week – President-elect Trump and his cabinet nominations, the latest inflation data, continuation of earnings season, and recent Fed speak – all of which caused more caution for investors.

Unlike after the 2016 election, Trump has moved quickly in making cabinet appointments. After several more key House races were called last week, it is confirmed Republicans will retain majority in the House, giving the party control of the White House and Congress, paving the way for Trump to implement his policies, though some things could still prove difficult.

Perhaps the biggest market impact so far was the appointment of Robert F Kennedy jr. to head the Department of Health and Human Services. This sent many stocks in the pharma industry lower. RFK has more of an unconventional approach on health care with strong views on vaccines, mostly skeptical on the use, opposed to GLP-1 drugs, commonly known as weight loss drugs, and the overall view America has become too dependent on drugs. The pharmaceuticals industry was down 1.8% Friday alone and down 4.4% for the week.

There has also been upward pressure on Treasury yields after the election, with markets concerned about the level of government debt, its unsustainable path, and the projected deficits. The government debt is $35.46 trillion, an increase of $1.33 trillion over the past year and $7.53 trillion since before the pandemic. It makes more sense to compare the debt to our GDP, or gross domestic product – basically everything the US economy produces, a good measure of its size. This figure, the debt-to-GDP ratio, is 121%, up from 106.9% prior to the pandemic and up from 62% in 2007, prior to the Financial Crisis (see the history of this ratio below). Additionally, the US deficit as a percentage of its GDP, at 5.8%, is the highest among all OECD nations (Organization for Economic Co-Operation and Development). This, while it has generated significant economic growth, is an unsustainable path and something we believe needs to be addressed sooner than later.
(for clarification, the deficit is how much the government spends over what it earns in a given year, the debt is the cumulative total of all annual deficits, or the total amount owed).

What did not have an impact on markets, for the first time in months, was the latest inflation report. The consumer price index came in exactly as expected with the annual inflation rate at 2.6%, with the core index (which exclude food and energy categories) at 3.3%. Inflation has decelerated steadily until about June when that progress stalled. In fact, the annual inflation rate increased to 2.6% last month from 2.4% the month prior. Furthermore, the subcategory services excluding shelter, the best read on inflation in the services sector, is still up 4.5% from a year ago, over double the target rate.

While the rate of inflation has slowly decelerated over the past year and a half, the progress has stalled with the services sector proving to be quite sticky.

That is one of the moving pieces in the Fed’s equation when it comes to formulating its monetary policy. Inflation that is still above target and stalling on moving lower along with solid economic growth and a still tight labor market were the reasons Fed Chairman Powell said there are no signals the Fed needs to be in a hurry to lower interest rates.

The comments caused markets to reprice the probabilities of a rate cut at the Fed’s next meeting December 18. The odds of a rate cut, which would be the fourth of the year, moved from 80% prior to his comments to about 55% after his comments.

Earnings season is nearing a close with mostly retailers and smaller size technology companies left to report. As of Friday, the earning growth rate for Q3 was 5%, up from around 4% when earnings seasons began. However, estimates for 2025 earnings have consistently moved lower throughout the past two months, something to keep an eye on. If this continues, the strong momentum in stocks could stall. Nvidia’s earnings after the close on Wednesday is the key event for the week and could set the tone for the markets for the next several weeks.

Week in Review:

After stocks saw the second highest weekly inflow since 2008 during the week of the election (mostly coming the days after the election), stocks gave back most those gains last week with the major indices finishing as follows: Dow -1.24%, S&P 500 -2.08%, Nasdaq -3.15%, and Russell 2000 -3.99%. Treasuries were lower across all maturities with the 2-year Treasury yield up 7 basis points to 4.33% and the 10-year up 13 bps to 4.44%. Oil was 4.8% lower with concerns on oversupply. Gold ended the week down 4.6% with six straight daily declines and the largest weekly decline since 2021, mostly over Fed’s comments policymakers are in no hurry to cut rates. The dollar rose 1.6%, continuing its post-election strength, while Bitcoin increase 19.0% for the same reason.

Recent Economic Data

• Consumer Price Index: The inflation report was about as in line with expectations as you can get. The consumer price index increased 0.2% in October, matching last month’s increase, and is up 2.6% from a year ago, picking up from the 2.4% annual increase in September. Food prices increased 0.2% while energy prices were flat and down 6.7% over the past six months and 4.9% over the past year. Excluding these two volatile categories, the core index rose 0.3% and was up 3.3% over the past year, matching last months pace. If you look at the trend in core inflation, it has gradually come down, until about June where it leveled out then recently increased again and will be something the Fed will want to see continue to move lower if it wants to continue its rate cut path. Finally, a sub category that looks at just services prices, the index of services excluding shelter, increased 0.4% in the month, is up 4.4% annualized over the past three months, and up 4.5% over the past 12 months, also something to follow closely as this is where most the sticky inflation is centered.

• Producer Price Index: The producer price index increased 0.2% in October just as expected, and was up 2.4% from a year ago, accelerating from 1.9% in September. The core index, which excludes things like food, energy and trade services was a little hotter than expected, increasing 0.3% in the month and up 3.5% from a year earlier. The index for final demand services was up 0.3% in the month.

• Retail Sales: Monthly retail sales for October were mixed with the headline number solid but core coming in short of expectations. Retail Sales increased 0.4% in October, above the 0.3% increase expected, while September’s 0.4% increase was revised up strongly to a 0.8% increase. However vehicle sales gave the index a boost, with the index excluding vehicle and gasoline sales up just 0.1%, below the 0.4% expected. Of the 13 major categories, eight of them saw sales increase in the month, led by electronics, vehicles, and restaurants/bars. Categories with sales declines were led by miscellaneous stores, sporting goods, health/personal care, and furniture stores.

• Jobless Claims: The number of unemployment claims the week ended November 9 was 217,000, a decline of 4,000 from the prior week bringing the four-week average down to 221,000. The number of continuing claims was 1.873 million, down 11k from the prior week. The four-week average for continuing claims increased slightly to 1.874 million.

• Empire State Manufacturing Index: The Empire State Manufacturing Index was 31.2 for November, a sharp increase from -11.9 and the highest level in three years, suggesting manufacturing conditions went from declining to a substantial growth over the past month. The report noted new orders and shipments that “rose substantially” while labor market conditions pointed to steady levels and price increases remained modest.

• Household Debt: The Federal Reserve Bank of New York said total US household debt rose 0.8%, or $147 billion, in the third quarter to $17.94 trillion, and is up 3.8% from a year ago. Mortgage balanced rose $75 billion to $12.59 trillion, auto balance rose $18 billion to $1.64 trillion, while credit card balances rose $24 billion to $1.17 trillion. Delinquencies continue to rise – the percentage of balances delinquent was 3.5%, up from 3.2% in the second quarter. 

Company News

• Push to Split Honeywell: Honeywell shares rose over 5% after activist investor Elliot Management took a more than $5 billion stake in the company and is wrote a letter to the board pushing for it to break up to increase shareholder value. It wants the aerospace and automation business broken up into two separate companies.

• AbbVie’s Disappointing Drug Trial: AbbVie shares fell more than 10% after reporting its mid-stage trials for Emraclidine, its treatment for adults with schizophrenia, did not meet the company’s primary endpoint, a disappointment to shareholders after AbbVie had acquired the pipeline through its buyout of Cerevel Therapeutics for almost $9 billion last year.

• Pfizer Exploring Options: Pfizer is reportedly exploring the sale of its hospital drug unit, hired Goldman Sachs to evaluate the interest from potential buyers, including private equity and other pharmaceutical companies, according to Reuters. This comes shortly after activist investor Starboard Value took a stake in the company pushing for changes.

• Spirit Airlines Bankruptcy Looming: Merger talks between Frontier and Spirit Airlines reportedly broke down after Frontier decided not to move forward with a deal. Spirit is now preparing to file for bankruptcy protection and is in advanced talks with bondholders to hash out a plan as it deals with big losses and looming debt maturities.

• Ad-Supported Subs Surge: Netflix said in a blogpost last week its ad supported subscriptions have passed 70 million users in just two years since its inception, a double from where its ad subscriptions stood in May. Over 50% of new subscribers are opting for the ad-supported version. Other milestones it mentioned was 40 million monthly active users in May, a 75% increase in the prior six months, and selling out all ad inventory for its Christmas NFL games.

• Amazon Haul: Amazon said it is launching a new section in its shopping app called “Amazon Haul” which will feature products priced under $20 in a move to compete with other lost cost shopping apps like Temu and Shein.

• Overheating Servers: An article from The Information said Nvidia’s new Blackwell chips, the advanced chips used to power artificial intelligence that was released this year and recently started shipping, are running into issues where they are overheating servers. Nvidia has reportedly responded by asking suppliers to change the design of server racks. Repeated design changes (of racks) is creating anxiety for its customers about a potential delay for when they will be able to use the racks.

• AMD’s Bigger Focus: AMD said it will lay off about 4% of its workforce so it can focus its resources on its “largest growth opportunities,” focusing more on its AI chips in attempt to capture more of the market.

• Meta to Monetize Threads: The Information reported Meta is planning to introduce advertisements on its Threads app early next year, citing people familiar with the plan. Threads was an app launched last July in a move to compete directly with X (Twitter) and as of last month had 275 million active users. 

Other News:

• The Senior Loan Officer Opinion Survey (SLOOS): This is a survey given to banks regarding lending standards and demand which noted little change to lending standards for commercial & industrial loans but somewhat weaker demand and somewhat tighter lending standards on commercial real estate loans. Lending standards were unchanged for residential home loans but weaker demand across all categories and banks were less likely to approve near or subprime borrowers. On credit cards, banks reported tighter credit standards overall.

• Artificial Intelligence Advancements Slowing: The Information reported OpenAI, creator of ChatGPT and a big Microsoft backer, is applying new techniques to improve the performance of its new large language model in development that goes by the codename Orion. It said the new model is not showing the same leaps of improvement as prior models, with improvements proving to be much smaller than those made in prior new models. It said one of the reasons for the slowdown in improvements is the rising scarcity of high-quality data available to train the large language models, with AI developers already having absorbed most of the data available. One analyst described the current situation as the sector seeing a plateau in performance of these large language models. A separate article from Bloomberg notes that OpenAI is not alone – two other leading AI companies, Alphabet (Google parent company) and Anthropic (an AI company), are seeing diminishing returns from the costly efforts to build new models.

• DOGE: President-elect Trump said last week that Elon Musk and Vivek Ramaswamy, former GOP presidential candidate, will head the new Department of Government Efficiency (DOGE). The new department is not an actual government agency, rather an organization outside the government meant to offer the administration advice and guidance to “drive large scale structural reform, and create an entrepreneurial approach to Government never seen before,” according to Trump. It will partner with the Office of Management and Budget. 

• Health Secretary Nomination: Pharmaceutical stocks were under pressure after President-elect Trump announced his nomination of Robert F Kennedy jr. to be the next Secretary of Health and Human Services. RFK has unconventional views on health care and strong opinions on several things including being opposed to GLP-1 drugs (like Ozempic, etc), skeptical on vaccines, and believes our country has become too reliant and dependent on drugs overall.

• Fed talk:
  • Fed Chairman Powell spoke last Thursday with the Dallas Fed and said “the economy is not sending any signals that [the Fed] needs to be in a hurry to lower rates,” which is fairly consistent with recent comments from other Fed policymakers over the past week. He said the economy remains remarkably strong which will allow the Fed to continue being patient in policy moves and on the labor market he said the tight level is not there anymore where it would cause inflationary pressures. After the comments, the odds of a rate cut at the next meeting December 18 moved to 60% from about 80% the day prior.
  • Barkin from Richmond Fed talked on consumer strength but noted they are becoming increasingly price sensitive. Kashkari from Minneapolis talked about the strong economy and talked about how inflation the next two months will determine if Fed skips its next meeting in December or cuts rates. Lorie Logan from Dallas said there is progress on inflation but talked how the Fed should proceed cautiously, comparing the rate cut process with steering an oil tanker, preparing for winds and waves that could push it off course.

Did You Know…?

IRS Tax Updates for 2025:

The IRS announced updates on contribution limits for 2025 which makes it a good time to review your contribution limits as we near the end of 2024 and head into the new year:

• 401k/403b/457/ Thrift Savings Plans – Annual contribution limits increased $500 to $23,500 for 2025.
  • Catch-up contributions, additional contribution limits for those over the age of 50, remain unchanged at an additional $7,500 (for a total of $31,000).
  • Under a change made in SECURE 2.0 Act, a higher catch-up contribution limit applies for employees aged 60 to 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500 (for a total of $34,750).
• IRAs – Annual contribution limit to remain $7,000.
  • The catch‑up contribution remains $1,000 for 2025 (for a total of $8,000 for those over the age of 50).
• Phase-out limits were increased. If you plan to contribute to a Roth IRA, you may be phased out if your income is over a certain level. Please reach out to us and we can discuss limits and possible alternatives.
• HSA – annual limit increased $100 to $3,300.

Several other tax updates were made, key changes below:

• Marginal Rates (tax brackets) – these were increased across the board.
• Standard deduction – increased $400 for single tax filers to $15,000, increased $800 for married filers to $30,000, and increased $600 to $22,500 for head of household.
• Increase in earned income tax credits.
• Annual exclusion for gifts – increased $1,000 to $19,000. 

WFG News

WFG Closed November 29

Please note that Wentz Financial Group will be closed Friday November 29th (Black Friday). We will be back open Monday morning.