Market Currents

• President Trump. Contrary to expectations, Donald Trump did the near-impossible and won all the battleground states that he needed to prevail in the Electoral College, despite losing the popular vote by a wide margin.  His victory also has been the spur for a sharp market rally in stocks, along with a backup in interest rates.

• (Maybe) A New Era. Tax cuts, increased infrastructure spending, and decreased federal government regulation will be cornerstones of the incoming administration’s economic policy.  Big questions for investors are whether Trump’s pro-growth, market-friendly policies will outweigh his protectionist views on trade and immigration, and whether, in any event, the Republican Congress will give Trump what he wants.

• Rates Rising. Worries that a wave of spending under Trump will widen the budget deficit and lead to faster inflation have prompted investors to step back from Treasuries.  10-year Treasuries currently stand at 2.4%, up sharply from 1.6% seen in the summer.  With interest rates marching higher, bonds have witnessed price declines.  We remind clients that the declines are purely losses on paper; individual bonds held to maturity return the face value of the principal at maturity.

• Aggressive Rotation. Capturing significant attention is the aggressive rotation between the sectors.  Banks, capital goods, and energy stocks – collectively known as the “Trump trades” – saw the strongest buying activity.  Meanwhile, the “bond proxy” stocks, largely from consumer sectors, went on sale.  Technology is perhaps the most unique aspect of the rotation trade, as they become a source of funds for the aforementioned purchases.

• Another European Referendum. Reflecting a part of a broader pattern in developed countries of a deep frustration with the way things are, Italian voters voted NO to constitutional reform.  This outcome was as a no-confidence vote for Italian Prime Minister Renzi, who resigned, and in turn marks an end to the reforms he started.  Fears are growing that Italy, like Britain, will also vote to leave the EU in the future.

• (Still) Cautiously Optimistic. As we are in the seasonally bullish final month of the year, we remain cautiously optimistic on the intermediate outlook for the market.  We believe earnings have troughed, setting a stage for higher stock prices supported by stronger profits.  We are politically agnostic, but believe that Trump’s policy initiatives are largely pro-growth and market-friendly.  Higher interest rates could pose competition for stocks, but a cautious Federal Reserve and high foreign demand for U.S. debt will likely provide some moderating offset to pressures for higher rates.