At dinner this weekend a friend asked me about the stock market's reaction to the election of Donald Trump as President-elect.  The Dow Futures fell over -500 points when the surprise of his election was first reported.  Yet, for the week, the Dow gained over 5% and most equity markets around the globe were up (see the table below).  With 20/20 hindsight I can offer some explanations, but I might not have been able to predict the reaction armed with only the knowledge that Trump would be our President-Elect.

First, equity markets are affected by many factors and it is difficult to isolate the component of each move with a single factor.  Non-election factors should have been positive for equities.  US Economic data has been a plus.  Purchasing Managers' Indices remained well in the expansion zone in October and showed overall improvement since September.  The US Employment Report for October was another positive for the markets.  According to Factset, corporate earnings for the 3rd quarter are projected to show a 2.9% increase, the first year-over-year increase since the 1st quarter of 2015.  Factset also reported that, so far, 71% of the S&P 500 companies have reported positive earnings surprises.

With that as a backdrop, the initial negative response in the overnight futures markets could have been a reaction to the electoral "surprise," not a well-thought-out or analytical response.  In fact, without a real plan, analysts must guess the kinds of policies that might come out of the new Administration and the Republican Congress.  Most appear to guess that gains for corporations will result in gains in the markets; that could explain the market's positive response this week.  Or, possibly, without the nonsense of this Presidential campaign, investors could have noticed the positive earnings and the economic reports, which gave stocks a boost.

A better metric might be to look at the fixed income markets.  The recent positive economic data is likely to lead to the Federal Reserve to raise rates as soon as next month.  Therefore, that would explain the higher interest rates.  The promises to spend on military and infrastructure while lowering the tax rates (fiscal stimulus) could lead to higher inflationary pressures.   Therefore, long-term rates rose more than short-term rates in response to expectations for higher inflation down the road.  The narrowing of credit spreads is another indicator that the coming administration might be positive for corporations, earnings, and the stock market.  Yet, the strengthening of the US dollar this week could create a hurdle in improving the US Trade Balance.

Personally, I believe that there may be too much optimism expressed in this week's market reaction.  Geopolitical risks of the pendulum swing away from human rights carries its own consequences.  Those concerned about human rights may need to turn to religious institutions, unions, or local political organizations to find a balance to the changes taking place in the Federal Government in January.  A sharp divide in our Country does not bode well for our future.  This week's protest demonstrations may be an early indicator.  

Economic Releases: US Employment

 The Federal Reserve publishes a dynamic model of the "Change in Labor Market Conditions," which uses 19 different labor market indicators to create a measure of changes each month.  The graph below shows the index levels since prior to the great-recession. Note that the October measure of +0.7 was a recovery from slightly negative numbers in August and September.  The Index has been predominantly in positive territory during the recovery.  

This positive move captured the October Employment Report where 161,000 jobs were created and 44,000 jobs were added in revisions to the prior two months.  The most significant positive in the October report was that the Average Hourly Earnings increased +0.4%, showing that the labor market has become sufficiently tight that the condition has put upward pressure on wages.

The week of November 5 the Initial Jobless Claims dropped -11,000 to 254,000, below the range of expectations; the 4-week average of Claims rose 2,000 to 259,750.  Continuing Claims, at 2.041 million also remained near record lows. 

The September JOLTS (Job Openings and Labor Turnover Survey) report rose to 5.486 million, but remained below the 2016 trend.

Source: St Louis Federal Reserve, FRED

Other US Releases:

The preliminary University of Michigan Consumer Sentiment Survey for November rose over 4 points to 91.6.

US PMIs moved further into the expansion zone in October.

Source: Econoday and the Wall Street Journal

Economic Releases outside the U.S.

In September Eurozone Retail Sales dropped -0.2%.   In Germany, Factory Orders fell -0.6% and Industrial Production (IP) fell -1.8% in September.  France's IP fell -1.1% in September.  In the UK, IP fell -0.4%, but Manufacturing Output rose +0.6%.

The Bank of Japan met and left its monetary policy unchanged.

The table below of the PMIs showed that the global economy moved broadly further into the expansion zone in October.

Source: Econoday and the Wall Street Journal

Equity and Bond Index Returns:

Equities markets rose on the week on the back up positive economic and earnings reports and in anticipation of a more corporate-friendly environment in Washington.  Factset reported estimated earnings increase of 2.9% for the 3rd quarter, the first increase since the 1st quarter of 2015.  Since quarter-end Factset's projected 12-month forward earnings for the S&P 500 has increased +0.9%, but the S&P has fallen -0.2%; the S&P earnings ticked down to 16.6 times forward earnings since the end of the quarter.

Data Source: Bloomberg app for the Iphone

Bond Yields and Spreads:

The stronger economic data and increased likelihood of a 2016 Fed rate increase, bond yields rose across the globe.  The surprise election win caused concern for inflationary pressures, causing long-term bond yields to rise more than short-term notes.  Credit spreads narrowed on the week, especially for high yield credits.

Data Source: Bloomberg app for the Iphone

Currency and Commodity Markets:

The US dollar rose against the Yen, Euro, Loonie, and RMB, but fell against the Pound.  Energy and metals commodity prices fell on the week.

Data Source: Bloomberg app for the Iphone

Equity Index Gains in US  dollar terms:

The equity table above shows the percent change of different stock indices in terms of its local currency.  To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency.  The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:

The S&P 500 was the best place for a US dollar investor to have been invested this week.

Disclaimer 

The views discussed herein are exclusively those of John W. Davidson.  These views are not meant as investment advice, and are subject to change.  Information contained herein is derived from sources believed to be reliable, however, Mr. Davidson does not represent that the information is complete or accurate and therefore, should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information purposes only, and does not pertain to specific investment objectives, the financial situation or the particular needs of any specific person or investor who might receive this report.  Investors should seek financial advice regarding the appropriateness of investing in any security or utilizing any investment strategy discussed or recommended in this report, and should understand that statements regarding future investment prospects may not be realized.  No part of this report may be reproduced in any manner without the express written permission of Mr. John W. Davidson.  Should you wish to be removed from this distribution please utilize the Safe Unsubscribe link below.