If there’s one thing this election year should have taught us by now, it’s to expect the unexpected. On November 8, Donald Trump again defied expectations and was elected as the next President of the United States, and he will be supported by a fully Republican-controlled Congress.
Although it initially appeared that we were going to be in for a sharp selloff on Election Night as the results were coming in, market losses began to reverse once the outcome was settled and Trump made his conciliatory victory speech. By the time the U.S. stock market opened at 9:30am on November 9, investors had calmed and the Dow and S&P quickly began posting modest gains. Since the election we have continued to see a U.S. equity rally. Expectations for increased federal spending, tax reform and a less restrictive regulatory environment appear to be supporting the market boost.
Market segments that have shown particular strength since the election include: 1) biotech and pharmaceutical companies, as Clinton was widely seen as a threat to the industry given her expected scrutiny of drug price increases; 2) stocks that are poised to benefit under increased infrastructure spending, such as industrials, materials and resource companies, and 3) defense stocks, as Trump is seen as likely to increase military spending.
Despite the recovery in U.S. markets, emerging market equities are selling off and are down 6% so far this month, as this segment of the market includes countries like Mexico, China, and Russia where Trump’s victory could have direct and uncertain consequences. Obviously it is anyone’s guess at this point what President Trump’s foreign policy and trade policy will actually look like as he shifts from campaigning to governing.
Within the bond market, the U.S. Treasury yield curve is steepening. Longer-term interest rates are moving higher as Trump’s plans to increase spending are seen as a potential boost to inflation. On the short end of the curve, the widely expected December interest rate hike appeared to be somewhat in doubt in the immediate aftermath of the election, but Janet Yellen has since testified to Congress and made very clear that she expects the hike to occur as planned.
As always, the events of the past two weeks have shown us again how dangerous it is to try to time or trade in anticipation of macro events. Countless financial, media, and political experts were proven wrong on November 9, both in terms of the election outcome and the subsequent market reaction. Our message continues to be that strategic investment plans have been established for good reason, and deviating from those plans based on a near-term uncertainty is almost always a bad idea – and a costly one as well.