As the final votes are being finalized, it appears that Donald Trump has secured enough Electoral College votes to be elected President of the United States. At the same time, Republicans appear to have maintained control of both the House of Representatives and the United States Senate. Stock market futures sold off dramatically (S&P futures reached their 5% down limit) as election results pointed to a Trump victory, before rebounding sharply.
For historical perspective, the S&P 500 Index (INDEXSP:.INX) was down 2.4% the day after the 2012 election and down 5.3% the day after the 2008 election. Volatility in the immediate aftermath of presidential elections is more the norm than the exception. Volatility is not limited to stocks. Bonds have sold off (pushing yields sharply higher) and gold has surged more than 2%.
The surprising outcome of the election is a reminder that, in politics as well as the financial markets, if your underlying assumptions are faulty it does not matter how well you can manipulate data. Forecasting is a game at which it is notoriously difficult to have sustained success. As such, it is premature (and likely unrewarding) to draw significant policy implications from yesterday’s election. While we have a sense of which political actors will be involved, the policy environment going forward is far from certain. In our view, investors should instead heed the message from the weight of the evidence.
While mixed right now, the weight of the evidence appears poised to improve as we move toward (and into) 2017. As the noise from the presidential campaign diminishes, seasonal patterns and trends could improve from neutral to bullish. Stocks tend to rally in the wake of presidential elections and they could enjoy a tailwind from a seasonal perspective well into mid-2017. Breadth has deteriorated over the past few months and is now only neutral. This moderation remains consistent with a consolidation/correction that is likely to be limited in degree and duration. As we watch the near-term stock market reaction to Trump’s victory, we will be looking for early evidence of positive breadth divergences. The excessive optimism that was present in the stock market this summer has already ebbed and we are seeing increased evidence that pessimism is reaching at least near-term extreme levels.
The ending of the 2016 presidential campaign could provide an opportunity for the stock market to re-focus on improving market fundamentals. A Fed rate hike in December continues to look likely and continued interest rate normalization is unlikely to be a headwind for stocks. Valuations remains elevated, but somewhat overlooked in the election season is evidence that earnings are starting to recover.
After four consecutive quarters of decline, earnings for the S&P 500 appear to have risen around 4% in the third quarter. Economic fundamentals remain bullish and the economy is moving into 2017 with at least a modest head of steam. Inflation has picked up somewhat, but this has been accompanied by improving wage growth, and an ending of the inventory draw-down cycle, and a rebound in export growth.
Bottom Line: As the noise of the presidential election fades, investors could be well positioned to focus on the news of the improving fundamentals. Any near-term stock market weakness is expected to be short-lived, with important support on the S&P 500 near the 200-day average (2085) and post- Brexit lows (near 2000).
Thanks for reading.
Twitter: @WillieDelwiche
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
