US equity prices spiked last week, rising 4.9% and pushing the market further into overvalued territory as investors processed the implications of another Donald Trump presidency, a further fall in interest rates, and continued earnings releases. Meanwhile, small and midsize companies rose faster than their large peers.

Will the Fed hold in December?

Bond prices were volatile, as the benchmark 10-year Treasury yield rose to 4.5% early in the week before falling back to 4.3% by the end of Friday. Two-year yields also rose, ending the week at 4.3%, as the probability of the Fed holding interest rates steady in December doubled over the week from 17% to 35%, according to CME FedWatch. Morningstar’s chief US economist Preston Caldwell still believes the Fed will cut rates by a further 0.25 percentage points in December following recent weak employment data.

Bond spreads widen

Corporate bond prices rose 1.2% as spreads (the additional yields an investor receives above what’s available on government bonds) narrowed further, with high-yield bond spreads reaching their lowest point since 2005. Meanwhile, the US Dollar Index rose to its highest level since early July before declining on Friday.

Trump 2.0: The impact

It is tempting to interpret these price moves as a harbinger of longer-term trends and adjust one’s portfolio accordingly. However, we always recommend investors prioritize research over reaction when assessing significant changes in the investing environment. To support this process, Morningstar’s equity researchers have published their analysis on how a Trump presidency could impact sensitive parts of the market, including Tesla TLSA, clean energy stocks, and the biopharma industry.

Do Presidents matter?

A longer-term, data-driven perspective can also lead to better decisions. Philip Straehl recently studied the impact of presidents’ political parties on equity returns over their terms. Starting with James Garfield in 1881 and ending with Joe Biden, he found that political affiliation accounted for less than 1% of the difference in returns. Meanwhile, the starting valuation of the market when investing accounted for 18% of the difference. For an investor, valuations are far more important than whether your favored president is in the White House.

Tech stocks still pricey

Because current valuations are higher than usual, the expected returns for the US market are lower. This somewhat pessimistic assessment is due primarily to the concentration of the benchmark index within large technology-oriented companies, many of which reported their latest results last week. These include Alphabet GOOGL, Amazon.com AMZN, Apple AAPL, Meta Platforms META, and Microsoft MSFT. We continue to see opportunities in other parts of the US market and in other countries, where expectations are more modest. As ever, thinking independently and investing patiently is the key to longer-term success.
Inflation Data on the agenda

While politics will likely dominate the news this week, economists will focus on the latest inflation data, which will be released Wednesday and Thursday, as well as economic activity data, which will be released Friday. The core measure of CPI (which excludes volatile food and energy prices) is expected to remain steady at 3.3% over the previous 12 months. A significant deviation from this outcome would likely change expectations for the path of interest rates and may cause some asset price volatility.

Get more insights from Morningstar in your inbox