Capital Markets Dashboard 11.11.2016

By Crest Capital Advisors on November 11, 2016

Dow, 5.36% to 18,847.66
S&P 500, 3.80% to 2,164.45
Nasdaq, 3.78% to 5,237.11
Russell 2000, 10.22% to 1,282.38
10 Year Yield: 20.79% to 2.15%
Outperformers: Financials 11.33%, Industrials 7.96%, Healthcare 5.82%
Underperformers: Utilities (4.08%), Consumer Staples (2.13%), Real Estate (1.47%)

Market Overview: Unexpected Election Result Still Sends Stocks Sharply Higher

US stocks finished sharply higher this week as politics dominated the headlines. In what some viewed as the biggest political upset in US history, Donald Trump defeated Hillary Clinton in Tuesday’s election. In addition, in a somewhat unexpected development, Republicans managed to maintain control of the Senate and they saw a smaller-than-expected dent in their majority in the House. The surprise Trump victory triggered a barrage of trading themes, the biggest of which was reflation. This led to a meaningful backup in bond yields that was exacerbated by a number of factors. One, which had already started to gain traction in recent months, revolved around the limits of unconventional monetary policy and the need for fiscal policy to do more to support growth. Another had to do with the potential for less regulatory scrutiny, specifically in financial services and pharmaceuticals, two of the 3 leading sectors this week.

A Funny Thing Happened in the Wake of the Election

On Monday of this week, the US stock market broke out of its negative funk of the prior 2 weeks (think 9 straight down days) and posted its best day since March. The euphoria was attributed to FBI Director Comey’s surprising Sunday decision not to pursue any additional charges over Hillary Clinton’s recently discovered new emails. This apparent clearing of Mrs. Clinton seemed to also clear the path to her election and the market was nearly 95% certain of such an outcome. Clearly, the market favored the certainty of a Clinton win over the uncertainty of Donald Trump. The proof was in the market. Fast forward to election night, and as the returns started to trickle in, the overnight futures market began showing signs of nervousness. As swing state after swing state was called for Trump, the nervousness turned into outright panic and markets were limit down 5% once it was apparent Trump would emerge victorious (see charts below). We thought we were about to get a major buying opportunity and certainly it was fulfilling everyone’s expectations that a Trump victory would lead to a market tantrum of epic proportions.

But, not only did we recover those overnight lows by the time the market opened, but we actually rallied by another several percentage points over the subsequent trading days! The market narrative completely flipped and there was a rapid shift in sentiment that largely prevailed throughout the rest of the week. Part of the credit went to a more pragmatic victory speech from Trump, with some of his advisors subsequently confirming the pivot and highlighting the distinction between candidate Trump and President Trump. The bigger tailwind seemed to come from expectations for fiscal stimulus from a combination of corporate (and individual) tax reform, infrastructure investment and deregulation. This overshadowed worries about the potential growth headwinds from Trump’s trade and immigration platforms, and was the bigger driver of a pickup in inflation expectations (though both played a role).

*Source: Strategas Research Partners

Reflation Trade Sparks Massive Market Rotation

The “reflation trade” (characterized by rising nominal growth expectations and especially inflation expectations along with firming sovereign bond yields) has been underway since before the election but Trump’s victory is now turbocharging the move as investors look forward to stepped up fiscal stimulus (via more spending and lower taxes) and more hawkish monetary policy. A small sampling of recent headlines are listed here:

                                      “Investors’ Trumped-Up Inflation Expectations”
                                      “Trump’s Infrastructure Pledge Boosts Inflation Expectations”
                                      “The All-Powerful Bond Market Is Getting Rocked by Trump”
                                      “Does Donald Trump Spell an End to Fed’s Low-Rate Era?”

At the moment stocks and yields are both rising in tandem as investors seem to be anticipating a Trump presidency benefiting nominal growth to such an extent it offsets higher borrowing costs. But there are still plenty of unknowns (timing of fiscal relief, scope of tax cuts, details of infrastructure spending, etc.) not to mention not all the pieces of Trump’s economic agenda are necessarily positive for growth (trade/immigration restrictions, etc.). In our view, a continuation of the upward move in yields is likely to undermine the valuation case for stocks. This is something we’ll be watching very closely. In the meantime, the chart below illustrates the knee-jerk ‘winners’ and ‘losers’ since election day.

*Source: Strategas Research Partners

Crazy Stat(s) of the Week

The iShares Biotechnology ETF (IBB), formed on February 5, 2001, had its best week EVER, rising more than 14%.

Trump’s triumph sparked the Dow’s best week in 5 years as the index closed at an all-time record high for the 11th time this year.

Quote(s) of the Week

“Tyranny is defined as that which is legal for the government but illegal for the citizenry.”

                                                        -Thomas Jefferson

Calendar of Events to Watch for the Week of November 14th:

It will be a busy week for October end earnings including reports from a number of major retailers. In addition, with the election in the rear view mirror, the focus will turn once again to Central Bank policy speakers. It will be a busy week for various Fed speakers culminating on Thursday with Janet Yellen and Friday we’ll hear from Mario Draghi.

US Economic Data

Tuesday 11/15 – October Retail Sales are released with expectations of a flat 0.6% v. the prior reading of 0.6%.

Thursday 11/17 – October Consumer Price Inflation (CPI) is released. Given the expectations for upward pressure in inflationary readings, this report will be scrutinized closely. The expectations are for a slight tick higher in the month over month data to 0.4% v. the prior 0.3%

Central Banks

Thursday 11/17 – Minutes from the recent European Central Bank (ECB) meeting will be released and ECB President, Mario Draghi, is scheduled to speak Friday morning, 11/18. Both events could help shed light on what the ECB plans to do at its upcoming meeting on December 8th. The big questions involve whether they extend the duration but taper the monthly amount. The scarcity of available assets to purchase is the main mitigating factor that concerns the marketplace.

Thursday 11/17 – Not to be outdone by the ECB, Janet Yellen is scheduled to appear before the Joint Economic Committee on Thursday to discuss the economic outlook.