The year of surprises continues!
It’s been an amazing year to be alive…that is if you are a market and politics geek or if you don’t let the noise of the world rile you too much. No doubt 2016 will go down in the history books as the year the unexpected happened. From a deal with the Iranians to Brexit to the election of Donald Trump, this year has paid handsomely for anyone betting on the unexpected (at least the media would make you believe all these were unexpected).
Now What? Now that the hoopla has passed and we have a clear outcome from the election what should investors do next?
It’s important to remember that elections, especially ones that do not involve an incumbent, tend to carry a higher level of noise and emotion. The 2016 election has been a great example of this. And because of this it is important for all Americans to remember that sensitivity isn’t a red or blue thing, it’s a human thing that at times should be exercised with greater intent. For those of you that have followed these missives or attended our events over the years should know that we are agnostic to politics. All we care about is how politics may help create or influence trends in markets and the results of this election have given us a lot to talk about - so let’s jump in.
Leading up to the election we ran several events entitled, “Make America Sane Again”. In these events, we discussed in detail what the potential influence a Trump or Hillary win would have on asset classes such as interest rates, equities and the U.S. Dollar. All three of which have seen some interesting moves since the election results. The goals of today’s writing are to give you an update on how markets have moved since those events as well as a potential game plan for the future if you happen to have stocks and bonds in your portfolio. Since big moves deserve big attention, let’s start with the asset class with the biggest move and depending on your portfolio allocation possibly the scariest move.
Interest Rates and The Election
Leading into the election we had noted in our “Make America Sane” events that a Trump win most likely meant higher rates. We even joked how it would be Murphy’s Law that the guy who made his fortune in Real Estate would also be the same guy that sets up the demise of the Real Estate market via higher rates. Now to be completely transparent our thoughts of higher rates were down the road if/when Trump was able to get some of his bigger tax and reduction of regulation plans started. We did not expect an instant reaction. Not only was the reaction to the Trump win instant, it was vicious to anyone owning the more “conservative” class of investments such as Government or Tax Free bonds. We have mentioned many times in the past that there will come a day when what used to be “conservative” becomes high risk. Has that day come? Looking at these charts does make you wonder.
As you can see by these charts, interest rates spiked higher and government bond prices dropped like a stone. Popular bond funds such as TLT and MUC witnessed declines of 7% and 4% respectively in the days following the election (source: Bigcharts). Bad day/week for the “conservative” portion of peoples diversification.
No use sitting around talking about what has already happened when what happens next is more important. The last 20 years has taught me two important things: 1.) that markets tend to overreact in both directions and 2.) that it’s usually the second mouse that gets the cheese (which should be the ongoing theme of this piece).
Based on those viewpoints, it appears the selloff in government bonds and spike in rates is a bit overdone and due for a pause and even a short term reversal. Anyone currently feeling nervous or anxious about their “bond” portfolio should probably be patient and based on the looks of the next reversal begin repositioning their portfolio in stages to help smooth out anything presently causing discomfort. I have found that the bond market tends to trade in ranges and to this market observer it appears the market is resetting its current range for 10 year government rates to between 2.25% on the high side and 1.8% on the low side. I would be remise for not mentioning that this recent move in rates does appear to be a bit disruptive and tectonic and I have a sneaky suspicion that the move in rates is more than just a reaction to a Trump victory. I also have a feeling this suspicion will be discussed in more detail in future writings. For now, the best I can tell you is come see us for more customized advice if your bond portfolio is causing some anxiousness.
The Best Ride at the Park – The Equity Market
While the move in the interest rate markets was vicious, the move in Equities has been a tale of two worlds. The old vs. the new, with the old folks giving the young folks a hell of a lickin.
A Trump victory has put some pep in the step of the “old world” economy with sectors like HealthCare, Financials, Defense and Industrials witnessing upward moves of greater than 5% following the days of the election (source:Bloomberg). Leaving their younger counterparties in the dust with Tech names like Amazon dropping more than 5% and Alternative energy plays, such as First Solar, dropping more than 15%! (source: Bloomberg).
As mentioned before, elections lacking an incumbent tend to have greater drama, especially when the results create a change in political parties running the show. In response to this “new environment”, money manager’s look to reposition their portfolios like a sailor does his sails to catch the most amount of tail wind for the risk they take. You can see that happening now within the equity markets as the big boys reduce their exposure to tech, alternative energy and anything deemed to have a headwind and increase their exposure to the perceived Trump benefactors of Basic Material, Financials and Defense. The result creates an environment where one index such as the Dow Jones, which is more influenced by these “old economy” names, moves higher to make new all-time highs while the Nasdaq, which has a greater weighting of the “new world” economy, fails to move higher setting up potential negative divergence between market indexes. This divergence may only last a short period of time, but it should be noted that if this divergence lasts into December or longer it may mark an important turning point for markets. Until and If that happens, here is what longer term equity investors may want to consider.
Now that the gorillas in the room (mutual fund managers) have tipped their hand, you should probably follow their lead within the allocation of your equity portion of your portfolio. This means increasing your exposure to health care, industrials, financials and defense when markets have pull backs. The driving thought behind this is that mutual fund managers will continue to allocate more capital to those sectors as long as Trump is making progress in getting his infrastructure, tax, defense and regulatory reduction plans in place. I would hope this creates an environment where those sectors see less downside during market sell offs as well as more upside potential when markets rally higher. This is something we will cover in greater detail when we begin our series of “5 Things You need to Know for 2017” coming up in December and January.
We have run out of time and space for anything else on this subject. If you have a greater appetite for this subject matter, join us on December 8, 2016 in our Irvine office for our event “Now What?!” where we will dive deeper into these subjects with a live audience. Hope to see you there.
The opinions expressed are those of Colby McFadden and Quiver Financial as of November 15, 2016 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment; always consult a Financial Advisor before investing into any investment. Securities offered through WestPark Capital, Inc. - Member FINRA / SIPC - Advisory Services Offered through WestPark Capital, Inc. 18872 MacArthur, 1st Floor, Irvine, CA 92612 - 800.992.5592