INSIGHTS

On November 09, 2016

Is Today’s Market Reaction to the Election Results an Opportunity for Tomorrow?

With the historic election results and overwhelming level of surprise, it’s no wonder that the markets have followed the headlines and rhetoric over the last few months with its volatility and shocking reaction. Rather than rehash how we got here, we feel it is more important to begin to assess the landscape for both the immediate future and longer term.

• By following the sun rising in the east and matriculating with it across the globe, one notices that the Asian markets took the brunt of the fear with the Nikkei index finishing down 5.36%, closing near the lows of the day. China’s Shanghai Composite finished down 0.62% after being down 1.6% at its lowest. The main culprit in the Nikkei move is also the anchor for the year in the appreciation of the yen. The selloff overnight was fairly subdued considering the move in interest rates in the United States. We continue to like both of these markets, especially the equity markets in China where the rise in producer price index (PPI) has been a good harbinger for economic growth. Estimates for the Chinese GDP has steadily been growing.


• The European equity markets had a much different day, possibly having to do with their recent experience with the Brexit and recovery of equity markets. The Euro Stoxx 50, London FTSE 100, the French CAC 40 and Germany DAX index all closed up over 1% for the day. This is in light of underperforming for the year. We continue to see promising long-term returns for the larger capitalized companies and export laden countries inside of Europe.


• The U.S. equity market – though not closed at the time of this writing – had the shortest severe correction perhaps on record. The immediate decline of nearly 0.7% was back to positive within 30 minutes and, at the time of this writing, is up nearly 1%. The panic selling that littered the overnight markets (exacerbated by lack of participants relative to the size of sell orders) quickly took to this being a buy opportunity. With all the cash being built over the last year, many were eager to put some money to work. I would not expect a linear spike from here to the end of the year, but rather some three steps forward to one step back. Earnings are already more favorable than we’ve seen all year and domestic and global economic activity is producing a tailwind not seen in some time. We continue to favor financials, materials, energy, consumer staples and discretionary and non-social media-based technology companies.


• The credit markets are seeing the highest re-calibration based on a multiple of factors; the FOMC (Federal Open Market Committee) raising rates in December is still on the table – and likely at that, inflation is picking up as we noted with China and here in the United States, and the massive flows into bond funds relative to equity funds begins to unwind and revert back to the mean. Recall in our note earlier this week that the last time the bond flows exceeded equity flows to the current magnitude was in 2012. The following year, the 10-Year Treasury moved from a 1.75% to a 3.02%, the S&P 500 was up 32.04% and the MSCI World Equity index was up 27.04%.


• Yield curves are steepening substantially based on a more increased-inflation environment from a feared, more protectionist state of trade. The bigger the move in the long end, the more inflation or deflation concerns are impacting the price. Take note of the move in the 30-Year and why investors need to be cognizant about the duration risk to their portfolios or mutual funds. When the Fed begins a more consistent and methodical move to hike rates, we will then see the “Grip of the Whip as volatile as the Tip.”

Source: Bloomberg | Past performance is not indicative of future results.

We continue to stay away from the long-dated, high grade and sovereign markets and prefer to have maximized credit risk appropriate to the investor and short to moderate duration. Though the potential tax plan proposed by President-elect Donald Trump may make tax-exempt municipals less attractive, they were already compensating for a move higher in interest rates relative to the taxable corporate market. The new tax will be very difficult to get through and would not sell based off this rhetoric, but rather take any weakness in this area to bolster income. We continue to like select energy and mining names, financials and technology debt

• As mentioned a few weeks ago and in our top calls for 2016, we believe the materials and commodity investment opportunity may be at a once-in-a-decade level for those willing to be patient. President-elect Donald Trump made infrastructure spending a focus, one we see occurring here and globally for the next decade. We still see gold as the best hedge for a fiat currency crisis. For further reading on our view on this opportunity: https://www.aamlive.com/blog/201610/constructive-on-infrastructure

We see today’s reaction from yesterday’s election as an opportunity for tomorrow. It does detail, however, that shocks to the system will always occur, but in the words of Paul Westerberg that doesn’t mean one should “Trade their telescope for a keyhole.”

CRN: 2016-1108-5627R

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com.