Election week saw record highs in stocks as they tuned in their best week since 2011. Through Friday’s close, the Dow rose a solid 5.3% and hit an all-time high, the S&P gained 3.8%, and the Nasdaq rose a nice 3.7%. Bonds were also a big story as prices dropped dramatically and yields hit their highest level since January. Gold reversed course and moved lower. Oil also fell with a 2.3% drop to close at $44.13 per barrel. The international Brent oil lost a little more than $1 to close down to $44.52.
Source: Google Finance
When I prepare to write these commentaries, I go back and review the news from the past week. It’s amusing now to see how certain the press was in a Clinton victory. Not only were they wrong on the election, but they were wrong on the market reaction to a Trump victory.
The worry behind a Trump win was the uncertainty it would bring to the markets. We have a pretty good idea how a Clinton presidency would go. Regardless of it being good or bad, it would have certainty.
The range of outcomes is wider with an unknown like Trump. It may be good, but it may be bad. This is the uncertainty that analysts thought would weigh on the markets. We saw estimates as high as a 15% drop in stocks with a Trump victory.
The market did initially fall on the results. In overnight trading, the Dow was briefly lower by 800 points. We came into the office reading headlines like “Market Bloodbath” and “Global panic in stocks.”
Obviously this didn’t last long.
We slowly started to hear people actually assessing the Trump economic policies:
“Wait, so we will get lower taxes?”
“We’ll get lower regulations?”
“There will be a repatriation of corporate earnings on cash stuck overseas?”
“We’ll actually get a business-friendly Washington?”
Investors began to realize that this administration could be very good for business. It was frustrating to many that this was not realized before the election, regardless of how loud it was shouted.
Regardless, stocks moved higher on the potential for pro-business policies. Specific sectors that would do well under a Trump administration (like banks, insurance, oil, coal, infrastructure, pharma and biotech, defense, industrials, and manufacturing) provided an extra boost to the market.
The consensus is that it will be nice to finally get some pro-business policies in Washington.
Switching gears a bit, corporate earnings season is winding down. 90% of companies in the S&P 500 have reported results and according to Factset, earnings are on pace to rise 2.9%. This is much better than the negative number analysts were estimating.
Since the election is the theme of this commentary, we’ll fit earnings into that theme. A common excuse for companies missing earnings this quarter has been to blame the election. It’s like the weather excuse we highlight often (where it’s cold, so people didn’t shop, or it was warm and people didn’t buy jackets, which have higher profit margins), but this quarter the election often took the blame for bad earnings.
It was cited by Starbucks and McDonalds. Dunkin Donuts blamed the “overwhelming dampening effect of presidential election.” And apparently people take fewer cruises because of the election, as was cited by Carnival Cruise Lines.
In the end, 80 companies in the S&P 500 used the election as an excuse for lower earnings. However, this was lower than the 100 who cited it in 2012, which we suppose is an improvement.
The worry behind a Trump win was the uncertainty it would bring to the markets. We have a pretty good idea how a Clinton presidency would go. Regardless of it being good or bad, it would have certainty.
The range of outcomes is wider with an unknown like Trump. It may be good, but it may be bad. This is the uncertainty that analysts thought would weigh on the markets. We saw estimates as high as a 15% drop in stocks with a Trump victory.
The market did initially fall on the results. In overnight trading, the Dow was briefly lower by 800 points. We came into the office reading headlines like “Market Bloodbath” and “Global panic in stocks.”
Obviously this didn’t last long.
We slowly started to hear people actually assessing the Trump economic policies:
“Wait, so we will get lower taxes?”
“We’ll get lower regulations?”
“There will be a repatriation of corporate earnings on cash stuck overseas?”
“We’ll actually get a business-friendly Washington?”
Investors began to realize that this administration could be very good for business. It was frustrating to many that this was not realized before the election, regardless of how loud it was shouted.
Regardless, stocks moved higher on the potential for pro-business policies. Specific sectors that would do well under a Trump administration (like banks, insurance, oil, coal, infrastructure, pharma and biotech, defense, industrials, and manufacturing) provided an extra boost to the market.
The consensus is that it will be nice to finally get some pro-business policies in Washington.
Switching gears a bit, corporate earnings season is winding down. 90% of companies in the S&P 500 have reported results and according to Factset, earnings are on pace to rise 2.9%. This is much better than the negative number analysts were estimating.
Since the election is the theme of this commentary, we’ll fit earnings into that theme. A common excuse for companies missing earnings this quarter has been to blame the election. It’s like the weather excuse we highlight often (where it’s cold, so people didn’t shop, or it was warm and people didn’t buy jackets, which have higher profit margins), but this quarter the election often took the blame for bad earnings.
It was cited by Starbucks and McDonalds. Dunkin Donuts blamed the “overwhelming dampening effect of presidential election.” And apparently people take fewer cruises because of the election, as was cited by Carnival Cruise Lines.
In the end, 80 companies in the S&P 500 used the election as an excuse for lower earnings. However, this was lower than the 100 who cited it in 2012, which we suppose is an improvement.
We think the economic policies coming from a Trump administration will be positive in the long run.
That said, we are a bit cautious on the market in the short run. Stocks have very quickly moved from cheap to expensive and we wouldn’t be surprised to see them take a breather here.
That said, we are a bit cautious on the market in the short run. Stocks have very quickly moved from cheap to expensive and we wouldn’t be surprised to see them take a breather here.
One concern, while we are seeing an increase in the stocks making new highs for the year, we’re also seeing an increase in companies making new lows. This is not a sign of a healthy market and is something to keep an eye on.
Another concern is the sharp move lower in bond prices (which means a higher move in yields). This could signal trouble is afoot. Investors might be seeing higher inflation,
or it may be a flight to quality, or it might just be a rotation out of bonds and into stocks. At this point, it’s too early to tell, but is something to keep an eye on.
Turning to the longer term, we think much of the rise in the market over the past few years has been due to the central banks and their stimulus. After all, it’s unusual to see record highs in the market while corporate earnings are in a recession. That would normally make us worry about stocks as the Fed pulls back from its stimulus.
However, we could see the pro-business policies balance out or negate the pullback in stimulus. We are unsure how this will eventually play out.
As for the rest of the portfolio, bonds to protect against inflation, or TIPs, remain a good long term hedge for inflation. Floating-rate bonds will do well if interest rates eventually do rise.
Some municipal bonds look attractive for the right client, too. We like buying individual, insured names for these bonds, avoiding muni index bonds if possible. We keep a longer term focus with these investments.
Gold is another good hedge for the portfolio. It is only a hedge at this point – rising on geopolitical issues as a flight to safety.
Finally, in international stocks, we see weakness around the globe and favor neither the developed or emerging markets.
Please note, these day-to-day and week-to-week fluctuations have little impact on positions we intend to hold for several years or longer. Our short and medium term investments are the only positions affected by these daily and weekly fluctuations.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
