Market Insights: Post-election update

 

Post-election update

Today is an important day from both an economic and equity/bond market perspective.  As you undoubtedly discovered last night, or first thing this morning, the next President of the United States will be Donald Trump, who is coupled with a Republican senate and congress.  What had seemed so unlikely at many times throughout the campaign has become a reality today.

There are many potential changes that will occur over the coming months and years, but we wanted to provide some immediate comments to give some market-specific context in the short-term for this historic event.  What started out looking like a steep sell-off, turned out to be a healthy gain for the markets today.  The S&P500 finished up 1.11%, which is even more impressive because the market was also up nicely on Monday and Tuesday leading up to the election (ironically on the relief-based on the assumption that Hillary Clinton was apparently going to win, according to the polls).  It is also impressive when one considers that the day after the 2008 election, the S&P500 was down 5.2% and the day after the 2012 election, the market was down 2.4%.  That being said, what is typically normal following an election is volatility, so that is no different this time, and should be expected.

Stocks with big positive moves today include:

• pharmaceutical stocks (Clinton had plans to target those companies for their aggressive pricing policies),
• bank stocks (potentially less regulation under Trump plus the prospect of higher longer term interest rates helping bank profits),
• infrastructure/construction stocks (Trump plans on spending as much as $1 Trillion on infrastructure projects) and,
• defense stocks (Trump has suggested increasing military spending).

To be fair, it wasn’t a positive day for all investments.  U.S. Government Bonds were down today on the prospect of a big increase in government spending and borrowing.  This gives bond investors slightly less comfort owning US Government Bonds, therefore the dip in the price today.  Also, consumer-related stocks were down today (particularly consumer staples); examples include Coke, Pepsi, Colgate, Procter & Gamble, in addition to utilities & REITs and some large cap stocks that have more international exposure.

At this point, we believe a Trump presidency will likely make little difference to the intermediate-term outlook for the global economy, but it has raised bigger question marks over long-term prospects.  The economic consequences for the rest of the world will remain unclear for quite some, but we suspect that they will be far smaller than many fear.  Much will depend on how much the Republican Party moderates his policies when he takes office.  Insofar as there is a change to domestic policy, it will probably be toward loosening monetary and fiscal policy, which should provide a boost for global demand.  The biggest risk globally is a move toward more protectionism, but at this point we see this being scaled back from earlier indications.  Elections do not in and of themselves cause recessions, but policies can be a factor, so it will be these policies that we will be watching the most closely over coming months and years. 

We want to be clear that the election results have not changed our near to intermediate-term outlook for the U.S. economy.  We will continue to monitor many important leading indicators that make up our Milestone Recession Risk (MRR) composite (which currently reflects relatively low U.S. recession risk), among others, and will keep you updated in the event of any changes.

We would like to close with some comments from Tony Dwyer (Canaccord’s Chief U.S. Strategist) that reiterates some of our own recent market insights via our Milestone Elements™ Newswire blog which can be found HERE:

“Although there will be so much written over coming days about what President Trump might do, we will stay focused on what we know: The only time to expect a significant and sustainable decline in broad equity prices is following very tight credit conditions that cause a recession. Time and again, as the market corrects, fear of pending recession and “it’s different this time” clog the inboxes and airways. Over the past 65 years (including the current cycle), there has not been a U.S. recession while:

1. The Real Fed Funds Rate remains negative,
2. the yield curve remains positive,
3. with no stress being priced into the Chicago Fed’s National Financial Conditions sub-indices.

Although anything is possible given the election outcome, it is pretty hard to make a sustainable negative economic case with (a) stable inflation, (b) a still historically accommodative Fed that is slow to act, (c) a demographic tailwind, (d) a turn in the global picture, and (e) a positive trend in S&P 500 (SPX) EPS and valuations.”