MARKET UPDATE
The Election and Its Aftermath
As the shock of the presidential election wears off, let’s examine how investors predicted and reacted to its outcome.
Heading into the election, financial markets seemed to have been biased toward Mrs. Clinton. Stock prices rose as polls showed her ahead and fell as her lead appeared to be weakening. In one of the most dramatic and volatile overnight trading sessions in the history of the equity futures market, the S&P Index dropped nearly 1,000 points(!) only to recover once Donald Trump was deemed certain to be the victor.
Did the market love Hillary, at least initially? In our opinion, investors feared Mr. Trump more than they had any sort of positive opinion toward his opponent. (Indeed, this may well describe the feelings of those who voted for her.) Trump’s protectionist statements (advocating tariffs, for example) were a major cause for concern as they reminded investors of the Smoot Hawley Act of the 1930s, thought by many to have turned a recession into the Great Depression.
Then everything changed. Once the market digested the fact that Trump will be the next president, stock prices rebounded powerfully. The consensus seems to be that businesses will be favored by a Trump administration, reigniting macro-economic growth. Financials and industrials outperformed other sectors, as they have the most to gain, if the past is any guide, from a strong economic rebound.
What does the election mean for us as investors? First, these few weeks confirm our approach to managing client portfolios. We are not intimidated by nor do we react in a knee-jerk way to short-term economic shifts or to political winds. Rather, we stick to our fundamentalist approach and maintain our view of the macro-economy, which produced positive results for clients for the year as a whole, even though we had to stomach short-term swings in portfolio values.
President-elect Trump’s promises, such as tax cuts for both individuals and businesses and incentives for corporations to bring their cash kept overseas back home, combined with an administration friendly toward economic growth in general, has turned the market mood optimistic, as it should. Sectors that may be more affected than others are:
Financials. If the Trump administration does loosen financial regulations, this can prove to be a boon for the financial industry. Valuations in this sector have been depressed lately
(though they have rebounded recently as interest margins have begun a long awaited recovery), partly due to regulatory changes both enacted and threatened, and partly due to slow economic growth and a challenging environment for financial business models. Finally, although Mr. Trump has said some critical things about Wall Street, his post-election recruitment of bank executives encourages a more optimistic future for this industry.
Retail. The labor market is recovering, supporting consumer confidence and, obviously, raising household income. Furthermore, the retail sector is most directly impacted by tax cuts, which leaves consumers with more cash to spend.
Industrials. The president-elect’s promise to invest heavily in infrastructure bodes well for these companies, as does his preference for American-made goods. However, tariffs are known to be damaging to the world economy, and protectionist legislation will not be looked at favorably by the market.
Fixed income. If the current dynamic continues, and with it, interest rates, this asset class will soon be interesting as an addition to client portfolios, especially those targeting income. Hopefully, an optimistic market will absorb a rate hike without sharp price volatility.
So is everything rosy? Not necessarily. As a whole, stock valuations (on a price-earnings basis) are definitely on the high side. In addition, none of the above factors may actually play out, or they may be drowned out by other, negative, developments. In other words, we can’t predict the future.
What we can do, though, is own shares in companies: a) that have healthy balance sheets, b) that are producing profits, and c) that are not expensive. We can look at the economy and see the underlying strength that has been bottled up the past few years. And we can keep to these simple, intuitive principles despite waves of panic and giddy optimism. This is what we’ve done, and we see no reason to discontinue.
