The week that was…
Well, THAT was an interesting week. We ended last week’s “The Week Ahead” section by saying:
Please note the market enters the week VERY oversold. Conditions are there for a bit of a snap back rally.
Ironically the market saw that snap back rally both due to bullishness on a Clinton victory Monday (best day since March)….
“The rally is all about Clinton having a better chance of winning, though I don’t think the market is celebrating her policies so much as reflecting how markets, like many Americans, are fearful of the unknown that comes with Trump,” said James Meyer, chief investment officer at Tower Bridge Advisors.
“From Monday’s action, when futures lit up soon after [Federal Bureau of Investigation] Director Comey’s comments, it is clear that the market is pricing in a Hillary Clinton victory,” Krosby said.
…and then again Wednesday on a Trump victory (with a massive overnight selloff Tuesday night thrown in for fun). The upshot of the week was FBI director Comey’s “all clear” signal last Sunday set the stage for a presumed Clinton victory which the market liked for “we know what she is all about” – hence a Monday rally. Then as poll results came in overnight Tuesday the market panicked initially with losses in the range of 5% in most major indexes around 11 PM+. Circuit breakers were triggered in S&P futures in fact. Some calm returned as the hours passed and we woke up Wednesday to material but not awe inspiring losses – and once the market opened that turned into a rally.
Why? Our guess here is Trump was not taken seriously as the winner so there was original panic overnight. Then a second glance at what he seems to want to do and trying to ferret out his economic policy as best as possible with vague parameters, he looks like he wants to spend like a Democrat on infrastructure – which will be a stimulus. While cutting taxes like a Republican – which will be a stimulus. That’s a potent combo of stimulus in the near term if it all goes through Congress. (which is now controlled by Trump’s party) Never mind the estimated $5-$6 Trillion in debt this is supposed to generate (before additional “growth”) – that’s a problem for another day.
“What traders saw was a far more expansive fiscal policy than what they had imagined under Hillary Clinton,” wrote Thierry Albert Wizman, global interest-rates and currencies strategist at Macquarie. ”Moreover, with the Republican sweep of the House and Senate, the prospect that President Trump will actually enact low tax/high-spending policies (a fiscal expansion) was seen to have gotten credible and valid.”
The Committee for a Responsible Federal Budget estimates the Trump proposals would reduce revenues by $5.8 trillion over a decade. Overall, Trump’s measures are forecast by the group to add $5.3 trillion to the deficit over 10 years, versus the $200 billion rise that was expected over the same period under the Clinton plan.
Oh and throw some banking deregulation in and you had a big upshot Wednesday especially in construction and financial type companies. Oh and biotech too as prospects of pressure on pricing fades away. And don’t forget defense companies…
Economic data was ignored as was the Fed speak as sector rotation was the theme of the week.
Federal Reserve Vice Chairman Stanley Fischer in a speech said that the “case for removing accommodation gradually is quite strong,” adding the Fed was “reasonably close” to meeting its target of a stable 2% inflation rate and full employment.
Here is a 5 day “intraday” chart of the S&P 500 via Doug Short.
This is pretty random data but here is how markets have done between Election day and Inauguration Day.
“The reality is if the economy is on firm footing and not in a recession (2008) or falling into a recession (2000), most the time the returns have been rather strong for the S&P 500,” wrote analysts at LPL Financial, in a Monday note. “Considering the economy currently is probably the best economy an incoming president has inherited since Clinton in 1992, this could be another plus for equities after this election.
The week ahead…
There was a massive rotation into “Trump” sectors Wednesday thru Friday so it will be interesting to see if people continue to pile into these soon to be crowded trades. I think I recall a similar move into “infrastructure stocks” post Obama election as well.
Retail sales is the major economic report of the week; it is expected to pop 0.5%.
Short term: The S&P 500 cleared back over it’s May 2015 high and is now (barely) above the downtrend line in purple connect fall highs. The NASDAQ is also back over it’s 2 major highs …barely.
The Russell 2000 was the champion of the week – look at that move Friday! Best weekly gain since late 2011!! This index is full of domestic companies as opposed to the S&P 500 which is far more full of multinationals. USA USA USA?
Kind of amazing that despite all that rallying the NYSE McClellan Oscillator barely broke positive.
Long term: Here are multi year weekly charts. For all the selling the prior week it is fascinating to see where the NASDAQ bottomed – exactly on this blue trendline connecting highs of 2015.
Charts of interest:
Where to start?
You rarely see moves like this in interest rates over a short period of time – this is 2008 type action.
The 10-year Treasury yield on Wednesday surged the most in three years to trade above 2%, a level not seen since January, on expectations Donald Trump will significantly boost fiscal spending, adding to the country’s debt burden. “While it is very early and most are trying to understand the forward thinking, the general perception is that a Donald Trump presidency will take us further into debt.” said Kevin Giddis, head of fixed-income capital markets at Raymond James.
Check out this breakout in the transportation index.
Gold and silver were essentially the inverse of the market indexes – sharp rallies overnight Tuesday and then hammered down the rest of the week. Note that silver could not get over our trendline in purple.
Copper? It looks like ‘murica is going to be building a lot of things in the coming year(s). It’s going to be hyyyyuuuge.
President-elect Trump’s plan to spend on infrastructure “could increase both annual U.S. steel and copper demand by over 9% each. In a global context, this can have a substantial impact on the copper market supply-demand balance to 2021,” said Paul Gait, senior research analyst at Bernstein, in a Friday note.
Speaking of… look at that sell off in emerging markets, concurrent with the election results. Very interesting.
Emerging-markets slumped on worries that Trump’s potential protectionist trade policies will hurt exports out of developing countries.
It was difficult to find major equity losers this week but Hertz (HTZ) raised its hand after the car rental company posted disappointing earnings Monday. Hertz reported its third-quarter earnings fell to $42 million, or 49 cents a share, from $237 million, or $2.60 a share, a year earlier. On an adjusted basis, the company would have earned $1.58 a share. Analysts had forecast earnings of $2.73 a share.
Valeant Pharma (VRX) continued its amazing descent as it plunged 22% Tuesday after slashing guidance for the year. It did manage to claw quite a bit of that back later in the week.
Nvidia (NVDA) soard nearly 30% after the chip maker late Thursday said profits more than doubled in the third quarter. Congrats to anyone who has held this to a >100% gain since spring.
Here is a sampling of random stocks in 3 sectors that really enjoyed the election results – financials, construction, biotech.
“Financials, especially regional banks are rallying on anticipation of less regulation. For example, regional banks had to keep their assets under management under $50 billion because above that threshold would mean higher capital requirements. But under Trump, this regulation may be scrapped, triggering lots of mergers,” said Diane Jaffee, senior portfolio manager at TCW.
“It seems clear that infrastructure-related stocks in particular are doing well on assumptions of significant infrastructure spending in a Trump presidency,” said Kristina Hooper, U.S. investment strategist for Allianz Global Investors. “Industrials would have benefited under either candidate, but with Trump he also gets a majority Republican House and Senate and will have higher chances of infrastructure bills being passed,” said Jaffee.
“Pharma stocks are big winners as the threat of price regulation is now gone,” said Diane Jaffee.
Have a great week and we’ll see you back here next Sunday!