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Like America, the Markets are Mixed

December 19, 2018
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The Reactions and Possibilities

As the election results poured in, futures plummeted 800 points then narrowed to 400 points. By Wednesday morning, the S&P 500 opened just slightly lower (much to our chagrin as we had hoped for a short term buying opportunity). By day’s end, the market finished in positive territory.

As always, though, there is more to the story. The “market” often just refers to the S&P 500, the index that, along with the DOW, you hear about on the radio every morning. Markets overall are quite mixed and trying to absorb the implications of any upcoming policies. This is our take on what is happening and why, and what may happen from here (take that part with a grain of salt – nobody knows!).

First, let’s start with the S&P 500, which represents the large cap U.S. stock market. Since the election, these stocks have continued to near new highs. To put this in perspective, the S&P 500 hits an all-time high approximately once every 19 days. So, this is not a major feat in and of itself. In addition, the market was right next to an all-time high the day before the election. Keep in mind that the gain, while nice, is just over 1%. Nonetheless, it is good news. The positive move is due, in part, to a major rally in large financial and health care companies, both of which expect regulations and policies to be rolled back. There is absolutely nothing that would suggest this is a misguided bet, and it is entirely possible both industries will see substantial, tangible benefits inside the first 100 days of the Trump presidency. To make matters a bit confusing, major tech stocks have been clobbered since the election, with heavyweights like Apple, Facebook, Amazon, Google and Netflix down around 10%. The most tangible explanation is that traders are concerned Trump’s potential trade battles will directly impact the supply chains of the global tech companies. Others simply see it as traders selling big tech to raise money to buy financials and healthcare stocks. It is likely a combination of both. Whatever the issue, our position is clear. US stocks, as a group, will be fine.

International stocks are ready to commit to daily therapy sessions. The developed markets in Europe and Asia have struggled amid stagnant growth, migration issues, multiple terrorist events, regional instability and Brexit. They now find themselves on the perimeter of a trade war. While international stocks had somehow fought off all their challenges and been up a bit prior to the election, they have raised the white flag and moved into slightly negative territory, at least temporarily. While a Trump presidency is by no means a direct hit to developed markets, they are not exactly dancing in the streets at the prospects of potential ramifications of trade policies (even though they won’t be a party to most of them).

And this brings us to emerging markets. Having roared to a nearly 20% gain prior to the election, these markets have suffered the largest pullback, down 6% post-election. Emerging markets, the only countries in the world with high projected growth rates and favorable demographics, provide many of the materials we use in our products (yes, some of which explode, but most of them work just fine). The reaction in emerging markets has been the most severe, and here the story is most complex. China, the mother of all emerging markets, has already sent a clear signal to Trump to tone down the trade war rhetoric. On Sunday, China’s communist newspaper included a government official’s piece saying the slightest overture from Trump will be countered with Boeing orders replaced by Airbus, a pullback in iPhone sales, and a halting of food imports. The article also pointed to 2009 when President Obama imposed a tariff on Chinese tires. China retaliated with a game of chicken, placing its own tariffs on U.S. car parts, and shortly thereafter the world’s shortest trade war ended. While all emerging markets are generally suffering at present, our expectation is President-elect Trump will pick his battles, likely with small players such as Mexico, and leave alone the big dogs like China, India, Brazil and Russia.

Energy, one of the strongest performers this year, has basically shrugged since the election, staying flat. Oil prices have fallen this week and, believe it or not, it has nothing to do with the election, just more of the usual stuff (OPEC is a mess, increased supply, etc.). The real estate index has pulled back, in large part because higher interest rates directly and negatively impact real estate prices. Speaking of interest rates….

Finally, the bond market was hit hard, down over 1% since the election (the bond market getting hit “hard” is an entirely relative thing!). Bonds are simply loans and the bond market is quickly and clearly telling the incoming Trump administration that the cost of money to make his domestic spending policies happen is likely to go up. Trump has promised massive infrastructure spending without accompanying revenues. Independent analysis of his proposed ideas show a sharply ballooning debt to make that happen. The markets are both telling us that won’t be free and also acknowledging the spending may spur the growth needed to finally propel more rapid growth and the accompanying inflation.

It has only been a few days and the U.S. is slightly up and, as a group, investments have slightly pulled back. It is far too early to clearly understand the ramifications of President-elect Trump’s proposals and how far he will take some or all of them. We are watching events unfold carefully and leaving all options on the table.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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