We experienced a major surprise with the election and also the market’s reaction on the days following (November 9th and 10th). The 2016 Presidential campaign was unlike anything we have ever seen. We have to go back to 1948 to see such a surprise election result. The reaction of the markets was unprecedented as well; following the surprise election of Donald Trump as America’s 45th president. The final polls were close going into Tuesday’s voting, however, few polls or pundits presented a real probability of Donald Trump winning. Over the last sixty years there have been a number of close election nights featuring the likes of Kennedy-Nixon, Carter-Ford, and Bush-Gore yet one would have to go all the way back to 1948 and Harry Truman’s upset of Thomas Dewey to find a contest in which the expected winner and loser so dramatically reversed fortunes over the course of just a few hours.
Overseas and pre-market trading here in the U.S. were caught off-guard. However, what transpired in the day to follow provided perhaps even more of an unexpected turn. As Trump’s victory became increasingly apparent throughout Tuesday night’s vote count overseas markets plunged and Dow Jones futures sank to the tune of more than 800 points. In our opinion, this initial reaction was one of uncertainty rather than any great concern in our overall economic or financial system. It was eerily reminiscent of the market’s reaction to Brexit last June, both in terms of magnitude and speed of decline. As fears of a market crash were bantered about amidst the election coverage, the day to come looked like it would certainly be a rough one for investors. Keeping with the element of surprise, stocks opened close to flat Wednesday morning and then quickly turned positive. Momentum built throughout the day with the Dow closing +256 points (1.4%). The S&P 500® and NASDAQ also moved higher by more than 1% leaving many to wonder how one trading session could reverse course seemingly just as quickly as had the fates of Trump and Clinton the night before. How did this happen?
A few thoughts:
- Investors realized, much like after the Brexit, that there are few investment alternatives to the US markets that can provide the same total return potential.
- Recognizing that the White House and both chambers of Congress would all soon be under Republican control, the markets contemplated the prospect of less government gridlock, reduced regulation, and lower corporate tax rates.
- Individual sectors of the market quickly reacted extremely favorably to potential industry specific changes under the new administration. This included bank stocks which rose on average about 5% as the prospect of a steepening yield curve and less government regulation was well received, and biotechnology stocks, which on average jumped close to 9% as concerns of Clinton induced drug pricing constraints fell by the wayside.
- There was speculation regarding the tenure of Fed Chair Janet Yellen under the new administration and that Mr. Trump’s first appointments to the Fed in early 2018 would likely be more hawkish than the committee’s current composition.
- The rapid flip flop of the markets illustrated the futility and difficulty of trying to time or predict market behavior. This reinforces our long term belief that the key to strong long term returns is a diversified allocation based on your needs. Pundits and market predictions should not have any impact on your re balancing or investment timing.
- Finally, we believe this as important a time as any in recent memory to maintain a long-term investment focus. While we have just experienced an election unlike any other since the days of our grandparents, history has nonetheless shown that markets ultimately follow economic and profit cycles rather than political ones.
Donald Trump has been extremely vague on policy; therefore the details of his plans are not well understood. However, we feel there are clear “big picture” items from his platform which can be placed in three categories:
Promote growth (tax reform, repatriation of foreign cash, stimulus spending, lower regulations)
Increase isolationism (anti-trade, anti-immigration, against foreign aid/military spending)
Repeal and replace Obamacare
With the Republican sweep in the U.S. Congress, we think it is logical to focus on where Trump has common ground with the Republican establishment to look for items which will be the focus for the first 100 days of the Trump administration
The uncertainty regarding the extent to which Trump will move forward with his electoral promises will probably maintain a degree of volatility in markets. After Brexit, the results of the U.S. elections continue to push toward more protectionism and isolationism. It remains to be seen what actual policy the new administration puts forward and how successful they are in getting it passed. We believe that we will see rising interest rates, federal debt and inflation but also rising markets. Those who are properly allocated and maintain reasonable expectations for return and withdrawals while ignoring short term swings should benefit.
Our team is here for you and your family and looks forward to discussing any questions or concerns you may have. As we look to 2017 we continue to take a customized approach to investing and planning for each client- we do not utilize models or proprietary funds. A proactive holistic approach will, in our opinion, become even more important as we see more volatility and regulatory complexity. Please contact us whenever we may be of service. randy.carver@raymondjames.com or (440) 974-0808.
The Wildcard
