From our CIO | Trump Wins, Earth Still Rotates
published: November, 09th 2016
By Rick Wedell, CIO
Market Update 11/9/16 – Trump Wins, Earth Still Rotates
Obviously a pretty large surprise overnight as Trump wins, something not predicted by any of the major polling services. Politico is calling it “the biggest upset in American history”. I’m not sure I agree with the hyperbole, but I will agree that last night’s results were not anticipated.
I’m going to pass on commenting on how or why the election results came out the way that they did. What is more important is our anticipation of how the markets will react to them today and for the next several months. Here are the key initial takeaways:
- It’s going to be a volatile next couple of days! The market, as represented by the Dow Jones Industrial Average, was down as much as 900 points at the low last night, or a little over 5%. Futures (contracts traded which are based on the DJIA where 1 contract = 10x value of the index) have since rebounded to be down plus or minus 2%.
- Our models and portfolios were conservative relative to their benchmarks going into the election, and we will likely be adding a little more risk in the next few days if the opportunity presents itself. There are parallels to Brexit (“British exit” where British citizens voted to exit the European Union), where the market downturn was sharp but short lived. We will also potentially look to sell some volatility at this point.
- As far as asset classes are concerned, the initial reactions are as follows:
- Treasuries are selling off as Trump’s economic plans are generally viewed as inflationary, and would further increase deficit spending. The 10 year was up at 1.92% earlier this morning. The Fed is still expected to hike interest rates in December, although if equity markets fall off significantly it could put that decision into question.
- Gold is rallying as there is a general risk off / safe haven trade
- Equities aren’t totally clear what to do – A Bank of America analyst was out this morning calling for 2000 on the S&P500, other commenters have been arguing that you aggressively buy the dip. On the one hand, Republican control is generally seen as pro-business (reduced regulation, possible reform of corporate taxes, etc.). On the other, Trump’s anti-trade rhetoric is generally viewed as negative for overall GDP growth, and the rise in treasury yields is firming the multiple ceiling on the S&P (the 17x we’ve talked about before) as represented by the Price-to-Earnings Ratio (Price of S&P500/earnings of 500 companies) as a way to measure value in a market. The general consensus is that heavily regulated sectors like healthcare and financials, and typical GOP favorites like defense contractors, stand to benefit the most from a Republican administration.
- International markets have generally been selling off, particularly Japan as their currency strengthened. Mexico is generally a disaster as it was / is ground zero for both Trump’s anti-trade and anti-immigration rhetoric. Trump may want them to pay for the wall but at current exchange rates it isn’t clear they could afford it. If you are looking to book a trip to the Mexican Riviera, now is the time.
- The Republicans now control the House, the Senate, and the Executive, and will shortly be able to move towards a more conservative Supreme Court. The last time we saw unilateral control of the government, we got Obamacare, a policy that was so unpopular with the majority of the American people at the time it was passed that Massachusetts elected a Republican senator in a special election in an effort to defeat it. My point is that unilateral control typically leads to policies, good or bad, that are generally out on the edges of what would be considered “mainstream”. We don’t actually know to what extent Trump will move towards the center now that he has control – that is what we typically see at this stage but this election has been anything but typical. We do know that there are a lot of possibilities on the table – repealing Obamacare, corporate tax reform, individual tax reform, and substantial revisions to trade policy (where Trump actually does not need to consult with Congress all that much). There will be a whole lot of reading of tea leaves as Trump selects his cabinet over the coming weeks.
- Policy changes are likely to take time to play out. No one, likely not even Trump, knows exactly what his policy agenda is going to look like, as it will depend upon how he plays with the rest of the Republican Party (particularly Paul Ryan who has had a cool relationship with the President Elect at best).
- The market has a history of hating uncertainty more than they hate the actual “bad” outcome. In other words, it’s entirely possible that we shrug this off as people wake up this morning, overcome the initial shock of the election, and realize that the world is still turning.
All the best,
Rick Wedell is neither affiliated with nor endorsed by LPL Financial.
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