Weekly Update

Emotional markets

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Published November 11, 2016timingcube_cartoon11112016

Followers of markets this week got a heavy and concentrated dose of the unbridled emotion that can affect markets. Stocks jumped higher Monday and Tuesday as it appeared a Hillary Clinton victory was likely (after nine consecutive days of losses begun when FBI Director Comey announced a new email investigation). Mrs. Clinton has been the Wall Street favorite for some time as she is more of a known quantity to markets; whereas Mr. Trump’s stance toward markets is unclear and occasionally has come across as anti-trade, a concern in some companies and sectors. As Tuesday night’s election results unfolded and a Trump victory became more and more certain, stock markets went into a panic, selling off to a “limit down” condition of -5% where trading is essentially halted until emotions calm down and participants can assess the situation without feeling like they are in the middle of a massive storm. Almost immediately thereafter investors began to reassess a Trump presidency in less dire terms. Stocks recovered almost as quickly with a morning press conference by Trump further easing concerns as he struck a more measured tone than he had during the campaign.

Chart 1: Trump’s victory rattles markets … briefly

Trump's victory rattles markets ... briefly

Overnight insights of the potential market winners and losers by market analysts fueled Wednesday trading. As stock trading opened the following morning in the U.S. investors began applying the overnight analysis. The result was a stark difference in performance between sectors expected to be in favor and those not so much. The broader thrust was a sharp jump in interest rates as forecasts of heavy government spending plans suggested the issuance of massive amounts of U.S. Government debt which in turn pressured prices of bonds – e.g. more supply equals lower prices. As interest rates spiked sectors sensitive to rates, such as real estate, utilities, and any investment focused on yield, sold off continuing a prior trend as rates had already been moving higher in anticipation of Federal Reserve rate increases. The second wave of victims in the market were stocks with heavy international presence as the higher rates drove the U.S. dollar higher and Mr. Trump’s anti-trade rhetoric was seen as negative toward other nations and their associated stocks.

Chart 2: Winners and losers in Trumpland

Winners and losers in Trumpland

Of course, the assumptions underlying all of these moves are speculative. Mr. Trump won’t be in office until next year and has not prescribed any concrete policies. However, the general view was that a Republican-led Congress would be amenable to the proposals of a Republican President. Wall Street’s herd behavior was on full display as investors ran with little real information and just followed the movement whichever way it went. That accentuated the market moves leading to a huge selloff in bonds, for one.

Chart 3: Long-term bonds take a tumble

Long-term bonds take a tumble

As markets actually get more concrete information regarding Mr. Trump’s policy plans, etc. it will be interesting to see which of these new trends sticks and which were knee-jerk reactions. For a few moments Tuesday night, our Turbo Model was holding a very profitable Sell signal. That signal ultimately delivered a much smaller gain. The intense emotions of Tuesday’s election played out full force in markets overnight, demonstrating fully the emotional factors that are such an integral part of investing.

Earnings “recession” energy-related

We’ve posted before on the impact that falling oil prices had on energy earnings. Those plunging earnings in the energy patch were weighing down overall S&P 500 earnings leading to several quarters of weak earnings performance. Chart 4 below shows that profit margins at least were just fine everywhere outside energy.

Chart 4: Profit Margins healthy except in energy

Profit Margins healthy except in energy

Market Update

Investors were taken on an amazing rollercoaster ride this week with stock anticipating, then reacting to, the U.S. presidential election. Stocks came into the week having lost ground in nine straight sessions and showing losses in four of the last five weeks of trading. Driving this pullback had been building election uncertainty coupled with rising interest rates as we close in on the Federal Reserve meeting in December and an expected hike in ‘official’ short-term rates. Monday began with a strong relief rally after those nine straight losing sessions. FBI Director Comey, who made news just a few days earlier with his ‘October Surprise’ announcement of new emails to be investigated, announced Monday that there was nothing to be found in those emails.
Stocks zipped ahead by +2.2% to nearly undo the prior week’s damage. Tuesday’s election day added +0.4% to the gains as long-term yields continued an upward move that began Monday. Overnight action Tuesday was one for the ages as stocks plunged at least -5% when Donald Trump took a lead, and then a victory, in the election. The result clearly shocked markets with money moving into some safe haven assets overnight. However, as the sun came up in Europe, stocks were clawing their way back only to close the Wednesday trade an amazing +1.1% higher. Bonds crumbled with the 10-year U.S. Treasury note yield pushing above 2% for the first time since January. The flight out of bonds and into stocks was clear though not all stocks participated in the rally. Financials, industrials, defense, healthcare bounced upward with a vengeance while other sectors, mainly interest rate-sensitive ones, got punished. Bonds continued their selloff Thursday while stocks largely idled. But again the difference among sectors and indexes was substantial and dramatic. The smallest stocks continued leaping upward while the Nasdaq Composite posted a loss on the day. Biotech, a sector long beaten up on expectations a Clinton administration would push for drug price controls, undid all that worry in large strides upward. The S&P 500 closed Thursday with a +0.2% move masking all the turmoil going on at the sector level. Friday offered a similar modest showing in the broad market with stocks flat. However, once again, small-cap stocks soared adding another +2% to their enormous weekly tally.

Warm wishes and until next week.