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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