Market Analysis – November 2016

Market Analysis – November 2016

Before the November 8 election, the strength of the US economy was well established, as demonstrated by the upward revision of Q3 growth (due to strong consumer spending) from 2.9% to 3.2% annualized. This, plus seven straight years of job growth and the strongest increases in wages since the Great Recession, combined with US home prices reaching a record high from the previous peak in 2006, put an end to housing’s lost decade. All these factors provided a fundamental underpinning to the market euphoria following Trump’s surprising victory, including Q3 corporate earnings growing by 5.2%, the strongest year-over-year growth since 2012. These underlying economic facts are important to remember to balance out the high hopes for what Trump might be able to accomplish.

stock or currency exchange market displau screen board

Many clients have asked why the market feared Trump so much and then quickly turned positive the day of his victory. I believe a strong factor is that Republicans ran the table on November 8 gaining control of the White House, the Senate, and the House of Representatives for the first time in a decade. If the Democrats had won back the Senate, the mood might now be a bit more muted. The past six years of gridlock in Washington appear to be over, bringing forth the real possibility of corporate and personal tax reform, deregulation, and fiscal stimulus by infrastructure investment. The Trump administration marks an era of business-friendly policies, and the market likes the possibilities.

We are having success investing in small cap retail, financial, and industrial funds. The small cap sector should benefit from Trump’s plans to improve domestic growth; the financial sector will benefit from higher interest rates and less regulation; and the industrial sector will grow from infrastructure and defense spending. “Overbought” and “oversold” are terms in market parlance. They refer to periods when the market gets over confident and then over reacts by becoming over fearful. These movements of advance and retreat are normal market behavior. It is possible that the November rally may have gotten ahead of itself (overbought) and a retreat (oversold) is to be expected at some point, but a retreat will not take away all the economic strength we have going in our favor.

In our Stable Growth strategy, which includes bond allocations, US treasuries had their worst month since 2009 as interest rates jumped up reducing the market value of bonds. I believe the sell-off in the bond market has gone too far (oversold), and that interest rates will level off. The bond market has already priced in a Dec. Fed rate hike. Our Stable Growth portfolios emphasize short to intermediate term bond funds, which trimmed their durations in November for protection. As usual, we welcome your calls.

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