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One of the most highly emotional elections in recent memory finally came to a close, and to the surprise of some, Donald Trump won the presidency. Although this result has sparked emotional responses by many, it is important to separate politics from long-term financial goals. Over the long run fundamentals of the economy and corporate America drive the stock market.

The good news on that front is the economic picture continues to show improvement and earnings are confirming the progress. In the third quarter of 2016, S&P 500 earnings are tracking to a 4.1% year-over-year increase, well above prior estimates and marking the end of the year-long earnings recession. Revenue has come back as well, as this was the first quarter with positive year-over-year revenue growth since the fourth quarter of 2014. These results further confirm that first quarter 2016 represented a trough in earnings, and the fourth quarter of 2015 was the trough for revenue. In fact, this quarter has a good chance to produce the biggest upside surprise in any quarter in more than five years.

Turning to the markets, the widespread belief was that a Trump victory would lead to a swift stock market decline and move into the safety of bonds and gold. Well, the exact opposite happened as stocks surged while bonds and gold took big dives. How could so many have been wrong about what might happen after the surprising results? It came down to optimism regarding a smooth transition, the anticipation of market-friendly policies like tax reform and infrastructure spending, and extremely negative sentiment heading into the election, as the Dow was down nine straight days for the first time in 35 years. When the worst didn’t happen, it sparked some of the buying on the news.

Leading the charge after the election have been financials, industrials, healthcare, and small caps. Financials have benefitted from upward interest rates and a steepening yield curve, which helps bank profits. Industrials have moved higher on speculation of infrastructure-focused stimulus spending. Healthcare jumped, as a Trump administration will likely be market friendly to the pharmaceuticals and biotech groups. Last, small caps added more than 10% the week of the election (versus 3.8% for the S&P 500) on the possibility of easier credit standards and their greater domestic focus.

All in all, economic and market fundamentals generally look pretty good to us. We all know there are risks including a policy mistake by a government or central bank, issues with the Trump transition, Brexit, China’s bad debt problem, and above-average stock valuations. But remember, stocks have historically done well in the last two months of election years and have performed well when the Republicans have both the presidency and control of Congress. No matter what emotions the election results might have stirred up, we encourage you to stick to your plan and stay invested.

As always if you have any questions, I encourage you to contact me.

Luciano Costantini – Principal & Director of Retirement Services, Sequoia Consulting Group

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.
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