November 9, 2016

Despite Dow futures plunging as much as 700 pts last night as victory slipped away from Mrs. Clinton, the major stock market averages opened higher this morning. The Dow and SPX are currently up 256 pts & 1.28%, respectively. That means the SPX is now only 1.5% away from its all-time high. The Healthcare and financials sectors are leading the way with roughly 4% gains. These sectors have been very politically sensitive to Clinton rants and have underperformed this year. Real estate, consumer staples and utilities are down more than 1% at the moment. The dollar is stronger today and yet commodities are also higher. WTI crude was down earlier but turned around and is now trading at $45.60/barrel. Bonds are selling off as yields head higher. The 5- and 10-year Treasury yields are 1.47% and 2.07%, respectively. So yields are back up to early 2016 levels. It seems like the market is building in expectations for not only modestly higher inflation, but also a Fed rate hike next month. 

This election outcome is a complete surprise to most investors. We had been trained to think that a Trump win would throw capital markets in chaos because his policies are either not well understood or concerning, and his public statements have been unpredictable and provocative. But while Wall Street may have been caught off-guard, it quickly recovered composure this morning. Famed investor Carl Icahn reasoned that perhaps the government’s war with business is now over. That’s good for the economy. Some are encouraged to think that recent onerous bank regulations (SIFI, Dodd-Frank) may get repealed. Former GE CEO Jack Welch said, “You don’t realize how bad regulation and this uncertainly over the last couple of years has put a weight over business. This [Obama] Administration has a new reg[ulation] every morning!” Investment newsletter author Jim Grant thinks Mr. Trump may end the Federal Reserve’s interest rate repression. He reasons that’s good for the economy in the long-term. Finally, Wall Street really hopes that the bad blood of a very contentious election can be healed. So there is a lot of hope that the business climate may improve.  

In terms of what happens in the future, the heavy-hitters are taking the opportunity to sound off. Allianz Chief Economist Mohamed El-Erian says a lot will depend on three things Mr. Trump needs to do: focus on deregulation & infrastructure investment; walk back his talk on trade protectionism; come across as a unifier. If he does these three things, we can stabilize. If not, the market will go lower. Wells Capital Management’s Jim Paulsen says “Everyone is excited about all the change that could happen. I think the reality is, the change is going to be far less and far slower…” What will really dominate is economic growth and earnings, and “those things are looking better.” He advises investors to “take any weakness as a buying opportunity…if people are going to panic and go risk-off.”  

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