Just Another Visit to Disneyland?

 

by Matthew Kuhn, AIF®, CFA

 

For me, the scariest ride at Disneyland is Space Mountain. For those of you not familiar with this terror, it is a pitch-black roller coaster ride. And if that is not disorientating enough, strobe lights blink incessantly as I wonder in panic, “where am I?”

Watching the market’s reaction to the surprise Donald Trump victory over the last week has been a lot like riding Space Mountain. The first fourteen hours had a 1,000-point swing in the Dow, a phenomenon we wrote about here last week.   Since then, U.S. stock markets have spiked to the upside and global stocks and bonds to the downside as market participants wonder “where are we?”

 

Market Reactions

Thus far, the market has defined the following themes based on the policies highlighted during Trump’s campaign:

  • Increased spending on infrastructure and defense = higher growth and inflation
  • Reform or repeal of the Affordable Care Act = bad news for hospital stocks
  • Decreased regulation = good news for drug stocks
  • Lower tax rates = higher growth and inflation
  • Immigration reform = less talent available for tech companies
  • Tariffs = bad for tech stocks

 

These themes were evident based on market performance this past week:

 Asset Classes One Week Return  Market’s Reaction or Expectation
 S&P 500 Index

(large stocks)

+2.0%  Relief rally with election over
 Russell 2000

(small stocks)

+9.0%  Increase in spending and growth
 Healthcare  Stocks +3.4%  Healthcare reform
 Pharmaceutical/

Drug Stocks

+8.9%  Less regulation
 Defense Stocks +9.3%  Increased military spending
 Construction Stocks +11.9%  Rise in infrastructure investment
 Energy +3.7%  Growth will raise demand for energy
 Tech Stocks -1.1%  Tariffs and immigration reform
 REITs -2.8%  Higher inflation + higher rates =

lower prices

 Utilities -4.2%  Higher inflation + higher rates =

lower prices

 U.S. 30 Year
Bond Yield
From

2.63% to 2.97%

 Higher interest rates =

lower bond prices

 U.S. 30 Year

Bond Price

-4.8%
 U.S. 10 Year

Bond Yield

From

1.86% to 2.24%

 Higher interest rates =

lower bond prices

 U.S. 10 Year

Bond Price

-2.4%

 

Looking beyond our borders, it appears Europe and Asia are taking Trump’s threats on tariffs and trade deals to heart:

 Asset Classes One Week Return Market’s Reaction or Expectation
 Developed Int’l Stocks -1.2%  Tariff and protectionism fears
 Emerging Mkt Stocks -6.7%  Tariff fears
 Global Bonds -4.2%  Stronger Dollar

 

Our portfolios are holding their own amid this uncertainty and are performing well. Our U.S. stock holdings are outpacing the broad indices as a result of our small company and value tilts. Our U.S. short duration and floating rate bonds have helped cushion portfolios as yields have jumped. We are monitoring our exposures to international stocks, international bonds and REITs, as storylines continue to unfold.

As Donald Trump prepares to enter the White House, we are confident in our overall portfolio strategy and will continue to assess and make changes as necessary. With a little luck, the next few months should be less scary than a ride on Space Mountain.

If you are interested in further insight to the post election market, we are going to be hosting three sessions of “Perspectives with our Portfolio Manager” on December 1st, 6th and 7th. See our website here for details.