Market Update: Wednesday, November 9, 2016


  • Trump shocks, stocks drop. Donald Trump’s surprise victory in the U.S. presidential election spurred an overnight selloff in risk assets with capital flowing into safe havens; moves that have since reversed to a meaningful extent. After S&P 500 futures hit their maximum decline of 5%, the index recovered to open only 0.5% lower. This comes after major indexes rose in the two days leading up to the election as traders saw a Clinton victory as the more likely outcome, although defensive sectors paced yesterday’s advance. Overseas, the Japanese yen spiked 2%, leading the Nikkei to a 5.4% plunge. Elsewhere in Asia, the Hang Seng shed 2.2% and the Shanghai Composite lost a comparatively small 0.6%. European markets have endured a volatile session and are currently trading in the green as evidenced by the Euro Stoxx 50, up 0.7% in afternoon trade after dropping 2.8% earlier in the session. The U.S. dollar sank following the election results, helping to provide a tailwind for COMEX gold ($1287/oz.), which is trading 0.8% higher; and WTI crude oil ($44.85/barrel), which is still lower but well off its lows near $43/barrel. Surprisingly, the yield on the 10-year Treasury note is hitting a six month high at 1.97%.


  • Goodbye to gridlock? In addition to winning the presidency last night, the Republicans kept the House and Senate, giving them both the executive branch and the two houses of Congress. While there is some tendency for both parties to overreach on policy when they hold both the presidency and Congress, since 1900 a Republican Congress and Republican president, which has been in place 22% of the time, has been the second-best performing combination for the Dow Jones Industrial Average, trailing only a Democratic president with a split Congress. Take it with a grain of salt though-most of those years took place before 1930. The only other time this combination has occurred since World War II has been for two years under Eisenhower (1953-1955) and for four years under George W. Bush (2003-2007).
  • Checks and balances are an important part of our political system. Although Trump is not a traditional politician, he will likely share the experience of leaving a fair amount of his campaign agenda undone. Checks and balances are an important part of our political system to eliminate the extremes that may be making investors nervous. Further, newly elected presidents tend not to have as much political capital as they think they will, which is one of the reasons they are typically unable to get all of their top priorities accomplished. Trump has a narrow Senate majority, won a closely contested election, and the Republican Party (not to mention the Democratic Party) is fragmented, making the policy path more difficult.
  • Corporate America is adaptable. American businesses have operated under many different political and policy regimes and economic cycles over many decades-recessions, surging inflation, Fed rate hikes, etc. Through it all, S&P 500 companies have grown profits by an average of 8 percent annually.
  • Clarity of election outcome is positive. Whether you like this election outcome or not, we do have clarity in the form of a defined outcome and that is positive. Looking ahead, the key for markets will be how much clarity we get on policy. On a positive note, the market’s Brexit experience-though we acknowledge a very different situation–provides a guide for markets to buy a dip in the face of uncertainty. And while this outcome is unique in many ways, the stock market has a comforting post-election track record. On the flip side, stocks have not historically preferred one-party control in Washington so that bears watching.
  • Potential Trump beneficiaries. First, healthcare is up solidly despite the sharp drop in stocks this morning and the potential repeal of the Affordable Care Act, as the market is reversing the onerous drug price regulation scenarios. Second, Trump is likely to be better for fossil fuels than Clinton, potentially benefiting the energy sector and parts of the industrials sector, though offset by potentially lower crude oil prices. Third, Trump is likely to roll back some financial regulation and may put upward pressure on Treasury yields, potentially boosting bank stocks. The uncertainty associated with the election outcome is boosting precious metals. Expectations of more defense spending should help boost defense stocks. And finally, increased infrastructure spending should help support materials and construction stocks.
  • Odds of tax reform increase. We believe tax reform including repatriation that allows companies to bring overseas cash back to the U.S. at a discounted tax rate stands a very good chance of being passed following the Republican sweep. This move would benefit big technology companies in particular that are holding so much cash trapped overseas.
  • Financial conditions key for the Fed in next 6 weeks. Odds of a Fed rate hike in December have moved down only modestly in the past 24 hours, and now stand at 75%, down from 85% on Tuesday. If the Federal Open Market Committee (FOMC) meeting was today, they probably would not hike rates, amid the gyrations of the financial markets in the past 12 hours. However, if markets calm down, and the economic data continue to point to higher inflation and an improving labor market, the Fed will likely hike rates in December. Fed Chair Yellen’s term expires in February 2018, and Yellen is responsible to Congress, not the president. Markets, especially international market participants will want to see continuity at the Fed.
  • Big drops after the election are normal. With futures lower, the initial reaction to Trump winning the Presidency is off to a rough start. Don’t forget though, the S&P 500 historically has dropped the day after the election. Looking at the most recent elections, the S&P 500 was down 5.3% in 2008 and 2.4% in 2012 the day after the election. By the time the next election took place four years later, the gains were 42.0% and 49.8% respectively. Looking at the past 10 elections, the day after election day has been lower seven times with an average loss of 1.8%. In other words, large initial losses are normal. The good news is the market was higher by the following election six of those seven.



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