First the reflex, then the rethink. The fast-twitch rush for risk that jolted markets following the decisive election result and excitement over potential growth-stoking policies gave way last week to a modest retrenchment and reassessment as some tradeoffs and unknowns encroach. The list of assets that went vertical on a geyser of speculative juices in the initial post-election burst was long and lively: Bitcoin and associated lesser digital scrip, banks and buyout firms, heavily shorted stocks and retail-investor cult favorites seen as close to the incoming regime ( Tesla and Palantir shares, for instance). The Goldman Sachs basket of the most-shorted stocks jumped around 10% from Nov. 5 through last Monday to its highest level in two years. The ratio of call options to puts bought surged to its highest level since January 2022 last Tuesday. For a moment there, aggression got the better of discretion. Still, in a more substantive repricing of growth expectations, financial, industrial and consumer-cyclical stocks have also led the way, adding to what had already been months of relative outperformance. Last week most of the speculative plays went to the bench for a breather, while mega-cap tech continued to struggle for traction, taking the broad S & P 500 down 2% for the week. This looks on the chart, for now, like an orderly settling-back of a slightly stretched index, though it did take the benchmark back to below where it opened on Nov. 6 and returned it to the pre-election highs set in mid-October. This retracement does no notable damage to the longer-term trend and has prevented a more unstable momentum-chase higher, at least for now. .SPX 1M mountain S & P 500, 1 month The S & P is still about 3-4% above levels where chart readers would start to get more concerned about the underlying trajectory. The Nasdaq 100, which surrendered its leadership credentials in mid-summer, is now back at levels first reached in early July. In both the ramp to record highs a week ago and in the latest pullback, the action has been rotational rather than monolithic, a sorting of perceived winners from losers under a possible higher-metabolism nominal-growth environment should deregulation and anticipation of tax cuts hold the market's attention into 2025. With the S & P 500 right back to its Oct. 18 closing level, it's worth noting that the small-cap Russell 2000 is still up 1% from that date while the KBW Bank Index is 10% higher. Even in Friday's 1.3% slide in the S & P 500, only two-thirds of all stocks were down on the day and the equal-weight S & P was off a modest three-quarters of a percent. 2-year bull market trend intact So, the market is trying to be discerning in its macro approach, reallocating toward cyclical exposure and reducing bets on possible government-spending-cut victims in defense and healthcare — all while allowing some of the frothier stuff to calm down around the margins. Even with these policy-tinted moves, the weight of the evidence on the key market drivers breaks down now roughly as it would if there were no election this month: Stocks have been in a steady uptrend for two years, and remain so. Corporate-earnings growth has begun to broaden out. Credit spreads are near the most generously tight levels of this cycle. Treasury yields were rising alongside upside economic-data surprises in a 2.5%-real-GDP-growth economy, and this has continued. For sure, some will argue the run higher in the 10-year Treasury yield to a four-month high above 4.4% and the climb in the ICE US Dollar Index to the top of its two-year range got extra oomph from the Trump win. It's plausible, even probable, but any effect is more accelerant than inflection. Yields have largely responded to a diminished view of how much and how quickly the Federal Reserve will walk short-term rates down to some version of "neutral" policy. Above-trend GDP performance and the pause in the decline in measured inflation had Fed Chair Jay Powell last week saying policy makers were in "no hurry" to cut rates further . This has left the market pretty evenly split on whether another quarter-point comes in a month, following the total 0.75-percentage points of cuts in September and November. It should be emphasized that a Fed able to utilize the luxury of a solid economy to normalize rates deliberately is not in itself a negative for the economy or stocks. The much-glorified perfect soft landing of 1995 saw only three rate cuts over seven months before the Fed went on hold for more than a year as growth and the stock market flourished. Pencil that in as the ideal, if not the most likely, scenario for how this goes. Investors all-in? It makes sense that the market wasn't able to summon a sustained thrust of exuberance after the election anxiety evaporated, given the somewhat demanding starting point. As noted here last week, the bull market is two years old, valuations are elevated, cyclical groups had already been outperforming, credit spreads have little room to squeeze lower and investor attitudes were more optimistic than fearful. The public is rather well-exposed to equities here, never mind what those pointing at $7 trillion in money-market assets say. Bank of America's wealth-management clients have 63% in stocks, near the upper end of a 20-year range. This can, of course, keep rising with the market. And other measures of retail-investor aggressiveness such as margin-debt balances aren't near dangerous extremes. Still, this argues against very many people "needing" to chase the tape higher. The initial post-election push higher in small-caps and unprofitable stocks momentarily took on the look of an early-cycle revival of macro energies and risk appetites. But the broader picture doesn't quite fit into such a spot. Warren Pies, co-founder of 3Fourteen Research, took a hard look at whether this shift justified a move into riskier stocks, but he concluded otherwise. A more mature economic and risk cycle and vulnerability to higher rates among smaller, lower-quality stocks mean they aren't likely to lead from here, Pies says. Still, just because the cycle has been rolling for a while doesn't mean it's nearly over, or that it can't be given more life by growth-supporting policies – or even just the collective hopes for such policies. Wall Street strategists still skeptical It would be unusual to see a consequential market peak when Wall Street strategists continue to carry average and median targets below the present index level. Watch as the sell-side handicappers start to unveil their 2025 outlooks for signs of whether the bullish story is becoming oversubscribed. It would also be somewhat odd if a major top in risk assets occurred without a flurry of corporate deal-making and new equity offerings. Both mergers and IPOs have lagged badly as a percentage of market value and world GDP for a while. A vociferous consensus now expects capital-markets activity to reach a rolling boil before long. A very plausible case, though how much has the market already taken credit for? Here's the past 20 years of Goldman Sachs' valuation in the form of price-to-book-value, which has soared to a post-Global Financial Crisis high. The last time it was much higher, Goldman and its peers had few limits on balance-sheet leverage or proprietary trading and were putting up returns on equity twice their recent levels. Is the market presciently foretelling an unleashing of transactional fervor that will return Wall Steet's middlemen to their former glory? Or might this be another sign, among several lately, of a kind of blinkered nostalgia taking hold among the masses?
