November-Here’s To Your Wealth
November, at least as far as the stock market is concerned, was the opposite of March: it came in like a lamb and went out like a lion. At the start of the month, there was caution and uncertainty about the election and its impact on the stock market. The conventional wisdom was that Wall Street and those in the know preferred a Clinton victory. During the campaign, when Clinton would fall in the polls, the stock market often dropped and when she would widen her lead, the markets would stabilize. Despite these moves, the net result was something of a ‘wait and see’ attitude.
When the results came in, after an initial drop in the futures on election night, the stock market celebrated the Donald Trump victory. In hindsight, the moves are clearly understood, but against a non-stop media onslaught about the pending catastrophe of a Trump victory, it was difficult to think unemotionally about a Trump victory and that is what led to the surprise rally.
With hindsight and a clearer vision, it’s easy to visualize that a roll back of even some of the massive bank regulatory structure would be good for bank profits and a huge infrastructure spending bill would spur industrial stocks while being stimulative for the economy. When the markets also started factoring in the possibility of corporate tax reform and the return of up to $3 trillion dollars of corporate profits held overseas, there was exuberance about U.S. stocks. And few groups benefitted more than financials which are banking on less regulation and higher interest rates as a result of the assumed infrastructure spending, corporate tax reform and subsequent economic growth. Higher interest rates have a positive effect on bank profits.
To be sure, this run-up was not universal. Just look at the so called “FANG” stocks. Facebook, Apple or Amazon (take your pick), Netflix, and Google trailed the normally staid bank stocks which were on a tear. Overseas stocks also lagged, and bonds got hit hard. The growth script that the trilogy of less regulation, more infrastructure spending, and corporate tax reform brings to the market may mean higher interest rates which are generally not good for bonds. The 10 year Treasury note approached 2.40% by month end – almost back to the level we saw at the start of the year erasing much of 2016’s appreciation.
Diversified investors might be looking at the headlines wondering why their balanced portfolios may not be following the Dow Jones Industrial Average into new highs. And the answer may be a result of their diversification notably the weakness in overseas stocks and U.S. bonds which had one of their worst months in recent memory. It might also be due to the somewhat concentrated nature of the rally. Take for example, the fact that only three Dow stocks are responsible for almost half of the November gains.
Looking forward, its important to recognize that none of the hoped for Trump policies have happened yet and stock markets always have the potential to disappoint – especially when exuberance is high. So the suggestion is to stay within your risk tolerance and stick with your long term plan. Changing investment strategy because of who is in the White House isn’t a tried and true success formula. The stock market is mostly driven by corporate earnings and while things look rosy now, what will happen if interest rates – and oil prices – continue to rise? Will the rise in rates strengthen the dollar which will hurt our exports and the profits of multi-national corporations? What if there is an unforeseen overseas event that surprises Wall Street? Or what if Mr. Trump is surprised by deficit hawks in his own political party that don’t go along with a massive infrastructure bill that raises the budget deficit? Nothing in politics is certain – and markets move in both directions. Usually when people least expect it.
Quote of the Day:
“Elections should be held on April 16th – the day after we pay our income taxes. That is one of the few things that might discourage politicians from being big spenders.” – Thomas Sowell
Learn more about Mark Avallone’s recently released book, Countdown To Financial Freedom
Mark Avallone, MBA, CFP®, CRPS®. www.PotomacWealth.com
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This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. Diversification and asset allocation do not guarantee against loss. They are methods used to manage risk.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
*The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Consult your financial professional before making any investment decision.