Post-Election Investment Update

Markets React, Then Rebound

The election of Donald Trump sent global markets spinning into the red overnight as investors worldwide reacted in the wake of his widely unanticipated victory. In the morning, however, the Dow futures had recovered their overnight losses and the U.S. market had worked its way into positive territory by early afternoon. Many foreign markets rebounded from their lows as well. European markets closed the day higher. As I write this note at 11AM Pacific Time on November 9th, the U.S. markets are up nearly 1% from the previous day’s close.

Underlying Stocks Are Volatile

Under the surface of the broad market, however, certain industries are responding to the Trump victory with very high volatility. Drug and biotech stocks are up significantly on the prospect of lower pressure on drug prices while hospital stocks are down based on a Trump administration’s promised attempt to repeal the Affordable Care Act. Real estate investment trusts and some other high-yielding stocks that compete with bonds are down due to the perception that rates may move higher due to increased government spending on infrastructure and the attendant higher budget deficits. Bank stocks, which can benefit from rising rates, are going up for the same reason. Defense stocks are moving higher, as are construction-oriented stocks.

Markets Typically Find Equilibrium

Of course, it is much too early to anticipate the full effect of a Trump presidency on financial markets. No one knows what laws will be passed in Congress over the coming years or how they will impact the U.S. and global economies. However, investors can look to history to gain some perspective about the effect a change in leadership in Washington may have on markets.

Volatility typically increases going into elections, then tapers off after Election Day as investors begin to digest the change (or lack of change) in political trajectory. In terms of returns, markets have historically been agnostic as to the party affiliation of the White House occupant. They have done very well under both. From 1853 to 2015, the U.S. equity market has returned, on average, 11% annually under Republicans and 11% annually under Democrats.

But Uncertainty Lingers on Some Issues

Perhaps the biggest uncertainty is what the Trump administration will do about foreign trade. Will there be a pronounced move toward protectionist trade policy now? If so, how will such changes impact our multinational corporations? Companies in the S&P 500 Index (which in aggregate generate nearly half (48%) of their revenues overseas) would certainly be impacted by slowing trade. Investors’ worries about trade, however, may be partially offset by expectations of corporate tax reform and reduced regulation.

Ultimately, the main three factors that influence markets over the long run are corporate earnings, interest rates and investor sentiment. In the case of corporate earnings, there is finally some good news to report.

After four straight quarters of contraction in earnings, U.S. companies are finally poised to post earnings growth of approximately 3.5% to 4% in the third quarter. Most of the earnings drag has come from the energy sector in recent quarters and while energy earnings are not rebounding strongly, they are at least beginning to lap last year’s poor earnings—and thus not declining as much on a year-over-year basis. In broader terms, employment continues to firm and the U.S. economy grew 2.9% in the third quarter, the fastest rate of growth it has posted for two years. In short, our economy continues to recover at a decent clip.

Please do not hesitate to contact me if there is anything about the election, the markets or your portfolio you would like to discuss.  Email me at: thoms@orioncapitalmgmt.com or call 619-435-1701

   

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