Stocks Ride to Best Month Ever After 'Red Sweep' Unleashes 'Animal Spirits'

November has emerged as a stellar month for U.S. stocks, marked by robust gains across major indexes and an air of optimism fueled by political and economic developments. The month kicked off with a Republican "Red Sweep" on November 5, which invigorated market confidence in President-elect Donald Trump’s “America First” agenda. This sentiment, often referred to as the revival of “animal spirits,” has propelled key benchmarks, including the S&P 500 and even cryptocurrencies like bitcoin, to new record highs.

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Much of this rally stems from investor optimism over Trump’s pro-business policies, which emphasize corporate tax cuts and deregulation. While there are concerns on Wall Street about the potential fallout from Trump’s proposed tariffs, the market seems to view these measures as bargaining tools rather than concrete threats.

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According to Danny Kirsch, head of options at Piper Sandler, markets are treating these trade threats as preliminary moves in broader negotiations. Kirsch noted that Trump's policy direction, centered on deregulation and prioritizing domestic interests, appears to resonate strongly with investors, fueling a renewed sense of market enthusiasm.

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This sentiment was tested earlier in the month when Trump issued tariff threats against China, Mexico, and Canada via Truth Social. While the Mexican peso and Canadian dollar experienced declines, along with stock markets in those countries, U.S. equities remained largely unaffected. Kirsch described the market’s resilience as a reflection of the broader appeal of Trump’s economic vision, which he believes has rekindled investor confidence.

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Adding to the market’s momentum was Trump’s announcement of Scott Bessent as his nominee for Treasury Secretary. Bessent’s focus on fiscal discipline, including a plan to reduce the federal budget deficit from 6.4% to 3% for the 2024 fiscal year, provided an additional boost to investor sentiment. Following this announcement, yields on the 10-year Treasury note, which had spiked after the election, moderated, alleviating concerns among some traders.

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The month closed with impressive performances across the board. Bitcoin approached the $100,000 mark, while the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite recorded their strongest monthly gains of the year. Both the S&P 500 and Dow achieved record closes, marking their 53rd and 47th of 2024, respectively.

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Notably, small- and mid-cap stocks were among the biggest winners, with the Russell 2000 index of small-cap companies gaining over 10%, its best month since December 2023. The S&P Mid Cap 400 also posted an 8.7% increase, narrowing its performance gap with large-cap stocks.

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Sector-wise, consumer discretionary and financial stocks within the S&P 500 delivered double-digit gains, while energy stocks climbed over 6% despite a decline in crude oil prices. Trump’s nomination of Chris Wright, a veteran of the fossil fuel industry, as energy secretary underscored his administration’s commitment to traditional energy sectors.

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Not all sectors shared in the exuberance. Healthcare stocks lagged, weighed down by Trump’s nomination of Robert F. Kennedy Jr. as secretary of health and human services. The announcement led to a sector-wide slump, leaving healthcare stocks only slightly positive for the month. However, biotech stocks showed signs of recovery in the latter half of November, with the SPDR Biotech ETF regaining most of its earlier losses.

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Clean-energy stocks faced challenges, with the iShares Global Clean Energy ETF dropping over 5% during the month. This decline reflects continued uncertainty surrounding the future of renewable energy under the incoming administration.

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Market optimism was further underscored by sentiment surveys showing record-high consumer confidence in stock market gains over the next year. Additionally, the put-call ratio for options tied to the S&P 500 declined, signaling reduced bearish sentiment. Some traders, however, are hedging against potential volatility, likely as a precaution to protect this year’s substantial portfolio gains.

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While U.S. equities have soared, international markets have not fared as well. European stocks and emerging markets such as China and Mexico have struggled since Trump’s election victory, reflecting a divergence in global investor sentiment.

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Despite the overwhelming positivity in U.S. markets, some analysts caution that risks may be overlooked. One notable concern is the Federal Reserve’s inflation data, which indicated that inflation remains above the central bank’s 2% target.

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The core rate of inflation experienced its first uptick since June, according to the PCE Price Index. George Cipolloni, portfolio manager at Penn Mutual Asset Management, warned that if inflation accelerates, it could pose challenges for equities in 2025. He observed that disinflation, which had provided a tailwind for markets in recent years, now appears to be a thing of the past.

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As November concludes, the market’s impressive rally highlights a renewed sense of confidence in the U.S. economy under Trump’s leadership. However, the interplay of optimism and caution suggests that investors will need to navigate a complex landscape of opportunities and potential pitfalls in the months ahead.

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