November was an interesting month. Topping the list of notable news was the election of Donald Trump, which marked the first time in U.S. history that a person with no political or military experience was elected President. Welcome to Brexit Americana. It should be noted that Mr. Trump's knack for periodically making off-the-cuff comments could result in occasional market volatility.
The financial markets initial response to his election has been a mixed bag. Yes, many indexes of U.S. large and small company stocks have hit new all-time highs over the past couple of weeks. Small caps in particular have shot through the roof. Other asset classes have been less fortunate, with many down for the month. These include U.S. bonds, foreign stocks and bonds, U.S. and foreign REITs, and precious metals.
Of these, I believe one of the most notable developments has been the drop in U.S. government bonds, which has resulted in a spike in bond yields (this due to the inverse relationship of bond prices and yields). The yield on the 10 year Treasury bond has risen from 1.60% as of September 30th to 2.30% as of November 29th. Based on this and other bond market measures, the financial markets seem to be expecting higher rates of economic growth and interest rates.
The second most notable development in my view has been the pullback in emerging market stocks. The year to date performance of these remains strong despite the pullback in November. I believe the recent weakness is attributable to concerns about what Mr. Trump's trade policies will be, and the impact higher interest rates in the U.S. will have on global fund flows (meaning will more money be drawn to the U.S. that might otherwise have been invested elsewhere). The bottom line is that a stronger U.S. economy should be a good thing for financial markets worldwide. In elections, the bark typically is bigger than the bite - I am doubtful that Mr. Trump's election will destroy global trade. Plus, valuations in emerging markets are very attractive.
So, has anything changed with respect to my outlook for the financial markets as a result of the election? Strategy wise, I believe the possibility of U.S. corporate tax reform is a game changer. While valuations of U.S. equities are high relative to other parts of the world, my optimism on them is heightened not only due to the possibility of tax reform, but also on the expectation of broadly improving earnings helped in part by the reduced drag from the energy sector. And despite the rise in Treasury bond yields, stocks remain downright cheap compared to bonds.
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®