The 2 things that will drive the stock market after last week’s Trump-Fed rally

Talk about an eventful week.

Normally, when the Fed cuts interest rates, that would be the big story.

However, Thursday’s Federal Reserve meeting pales in comparison to Tuesday’s presidential election, which yielded a winner before the sun came up the next morning.

The stock market reaction Wednesday to Republican Donald Trump‘s victory over Democrat Kamala Harris was swift and powerful, sending the Dow, the S&P 500 and the Nasdaq to all-time highs. The Fed rate cut the next day was icing on the cake for market bulls, with gains for the S&P 500 and Nasdaq. The Dow on Thursday was flat. On Friday, the Dow went above 44,000 for the first time ever, and the S&P 500 topped 6,000 for the first time ever. They closed just below those levels. All three stock benchmarks finished the week at closing record highs.

For the week, the Dow and S&P 500 both gained more than 4.6%. They had their best weeks of the year and their first positive weeks in the past three. The Nasdaq rose 5.7% for the week. The tech-heavy index’s weekly gain, while the strongest of the three, was only its best since September. For the week, consumer discretionary, energy, industrials, financials, and information technology were the top five sectors.

• Last week, we sold shares of industrial laggard Honeywell into strength three times, bringing the position down to levels that Jim Cramer said won’t hurt us. On Wednesday, when the already running Wells Fargo and Morgan Stanley both surged double-digits on a percentage basis after the Trump win, our discipline called for us to take some profits, which we did. BlackRock, one of our newer positions, was not participating in Wednesday’s rally in financials, so took some of those bank stock proceeds and bought some more shares of the world’s biggest asset manager.

We said last weekend that the risk to the market was not so much who won, but that whoever won did so decisively. That’s exactly what we got.

Wall Street, however, has traditionally liked gridlock in Washington over the long term, a situation created by a split Congress or the White House controlled by one party and Capitol Hil by the other. The exact combination remains up in the air. While the presidential race was decided quickly and the Republicans flipped the Senate, there were still House races too close to call, according to NBC News. As of Sunday afternoon, Republicans needed to win six of them to capture the majority.

Only time will tell how the balance of power will play out and whether it’s good or bad for the stock market. But one thing we do know is that Trump likes to grade himself on how the market performs. In Trump’s first term, from Inauguration Day 2017 to his last day in office, the S&P 500 gained 67%. Barring anything catastrophic, President Joe Biden and Vice President Harris will hand Trump the baton of a healthy economy with moderating inflation and a strong stock market.

In the week ahead, two government inflation reports are released that Wall Street and the Fed will be watching closely. Earnings season starts to wind down and only two Club names, Home Depot and Disney, report quarterly results.

The big economic report for the week, the October consumer price index, comes out before Wednesday’s opening bell. According to estimates compiled by FactSet, economists are looking for a 2.6% annual increase in headline CPI, slightly hotter than in September. The core rate, which excludes volatile food and energy prices, is seen rising 3.3% on a year-over-year basis, matching the prior month. The shelter component of the CPI, which accounts for roughly one-third of the entire index, will also be a key focus given how sticky the cost of housing inflation has been.

• While not as closely watched as the CPI, the October producer price index, which is out Thursday, could influence the markets. The monthly PPI readings are still important to monitor as they show wholesale prices that companies pay, often referred to as input costs, and whether they need to raise consumer prices to protect their margins. According to FactSet, economists expect to see a 2.3% annual increase in headline PPI and a 2.9% year-over-year increase in the core rate.

• Among the other data points this week, October retail sales and October industrial production are both out Friday. Retail sales give us a snapshot of the state of the consumer and where they’re focusing their buying power in the lead-up to the holiday shopping season. Roughly two-thirds of the nation’s economy is driven by consumer spending. The monthly industrial production and capacity utilization report provides insight into the manufacturing industry, which has been under pressure for quite a while, as well as the mining, and electric and gas utilities industries.

For Home Depot, which reports third-quarter earnings before Tuesday’s opening bell, we want to hear what management sees on the ground in the housing market.

We know longer-term bond yields have been ticking up and driving mortgage rates back up with them — so the benefit of stronger housing leading to more sales of building and renovation products might still be pushed out. We were encouraged to see bond yields drop on Thursday and Friday after spiking on Wednesday. We hope that continues with the Fed in easing mode and market odds favoring another rate cut in December.

• Additionally, a likely boost to Home Depot sales, partially in the reported quarter and likely more so going forward, will come from the recovery process after hurricanes Helene and Milton as insurance claims come through and homeowners look to rebuild. That said, we’re biding our time and predict that once the housing market really starts to inflect, Home Depot will be a primary beneficiary. As of Friday, consensus estimates call for Home Depot sales of $39.24 billion in the third quarter and earnings of $3.64 per share.

Disney reports before the bell Thursday, and its experiences business will be in focus as it has softened recently due to the recent hurricane activity that forced closures at Florida theme park locations and inflation-weary consumers. Disneyland Paris will likely see some negative impact from the Summer Olympics, which were held in the city during the quarter.

• Disney’s direct-to-consumer business, however, should be a better story as profitability improves. Big content releases like the new season of the critically acclaimed television series “The Bear” and the movie “Inside Out 2,” which did nearly $1.7 billion worldwide in the theaters, should help with subscriber numbers. As of Friday, consensus estimates are for Disney sales of $22.44 billion in fiscal Q4 and earnings of $1.10 per share.

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