Covenant Weekly Market Synopsis as of November 11, 2016

November 14, 2016

Wow… what a week. Risk assets began the week moving higher as most polls and pundits agreed that Clinton would win the election and there would be AT LEAST four more years of status quo government. Then the script flipped and equities galloped higher when Trump prevailed and it became clear that there would NOT be four more years of status quo government. The moves in between were very interesting.

After rising more than 2% on Monday (following a Sunday announcement that the FBI found no new evidence in a recently discovered batch of Clinton emails), markets closed relatively unchanged on Tuesday as investors and traders waited to hear about exit polling and the election results. When the Electoral College began to build in Trump’s favor, risk assets sold off. In fact, futures on US equities hit their -5% downside limit around midnight. Then there was another surprise. Rather than spike the football and tell everyone “I told you so” as so many expected, Trump gave what was widely lauded as a “Presidential” acceptance speech.  The change in tone from “Candidate Trump” to “President-elect Trump” also shifted the tone of the markets. Equity futures recovered much of their losses by the time markets opened on Wednesday and by the time they closed the S&P 500 was up 1.1% (a swing of more than 6% in 16 hours). The buying continued over the next two days and by the end of the week domestic equities had risen 3.9%. The buying was not just concentrated in the U.S., as developed international markets rose a respectable 1% – 2% on the week.

While equities rallied, US Treasury bonds were sold, and sold, and sold…. pushing yields higher on short, intermediate and long-term bonds. The yield on the 10-year UST closed the week at 2.15%, while the 30-year UST pushed to 2.94% on Friday and as of this morning is yielding more than 3%. The chart below compares the Treasury Yield Curve from five days ago (yellow dotted line) to today (green solid line). The take away is not only that the entire yield curve shift up, but yields on longer-dated maturities (7, 10 and 30-year) moved much higher than shorter term treasuries (see bar chart at the bottom). This is known as a steepening yield curve and it tends to be beneficial for financial companies (because they can borrow cheap near-term money and lend longer-dated capital at a higher rate).

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Source: Bloomberg

For a detailed view of weekly, month-to-date and year-to-date asset class performance click here.

 

Hmmm… A few additional standout market moves last week included:

  • Small cap stocks, as measured by the Russell 2000, rose 10.3% last week. Presumably small cap stocks should benefit from reduced corporate taxes and less government regulation, key points of a Trump Administration.
  • Value stocks outperformed growth stocks by nearly 2%.
  • FANG – former darlings of the stock market, Facebook, Amazon, Netflix and Google (now called Alphabet) declined between 1% – 2% (Netflix fell by 6%), likely due to investors rotating out of these richly valued companies toward industrials and financials that are expected to benefit from a Trump administration.
  • Emerging markets did not participate in the Trump rally as they benefit from a weaker US dollar and lower interest rates. Trump’s pro-growth policies will have the opposite effect. Our emerging market compadre to the south, Mexico, suffered mightily – the Peso fell 9.6%, interest rates jumped more than 7% and stocks fell approximately 7% over immigration and trade concerns.
  • Copper prices jumped 10.7% on the belief that demand for the industrial metal will increase with infrastructure spending.

 

The Future – If Trump is able to implement his fiscal stimulus and tax reform policies, he will effectively be injecting steroids into the slowly expanding domestic economy, generating higher growth and inflation, at least in the short to intermediate term. The countervailing force to consider is how fervently Trump will pursue some of his more protectionist campaign promises such as renegotiating trade deals and increasing tariffs on imported goods. Too much protectionism would reduce global trade and act as a headwind against domestic economic growth. It would also increase inflation as the prices of imported goods would be subject to trade tariffs. Too much inflation would have a negative impact on equity and bond prices. There are still a lot of questions to be answered. Thus far however, the markets have not only embraced, but have become a cheerleader for the type of change Trump represents.

Be well and Godspeed,

Jp.