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Markets & Trump

This Week: Markets settling down. Probably less disruption than the headlines imply.

As we write in the morning session the day after the election, here are some of the questions we’re asking:

 

Q: Do big political moves change market fundamentals? 

A: Rarely. Markets always over react in the short-term as short-term positions unwind.

 

Q:  What were the markets’ initial reactions? 

A: First comes the “Fear” trade. Gold, the yen and Swiss franc. And these are all one-day charts.

In each case, we see the initial panic overnight and after hours, then a resumption of the status quo. Lesson: Don’t trade on emotions.

 

Q: After the big changes, what happens next? 

A: Stocks take a longer view. There’s very little in the proposed policies to scare companies and the economy. There was an immediate stock rally, in contrast to the futures sell off Tuesday evening.

 

Q:  What about health care? 

A: The market had put health care stocks under a cloud up to the election. That seems over.

 

Q: Those look like big swings, right? 

A: Yes, major markets like Small Cap are up nearly 4% in a few hours and the health care sector of the S&P 500 is up 7%. This is a classic case of prices moving more than the facts. This is fundamentally the same businesses and prospects as a week ago. And probably a month from now.

 

Q: Treasuries are down. Why?

A: They rallied in the off hours so some of it may be simple position covering. There has been little mention of i) protectionism ii) repudiation of debt or iii) big infrastructure spending in the last few weeks. If those come back then expect weakness. However, we don’t believe they will.

 

Q: Will the Fed raise in December and will Yellen resign? 

A: No to the second. The market is lowering its expectation of a December rise from around 74% to a 62% probability this morning. They might wait if there is a messy transition but the Fed uses “orderly” in its minutes all the time and they’ll continue to be cautious.

 

Q: What broad themes do you expect from a Trump victory in the next few months?

 

Q: What headlines should I ignore? 

A: Any that start with:

  • “Trillions wiped off….” because global stocks are worth $70 trillion so it’s not much of a move.
  • “We’re in the ‘nth innings…”. They are confusing sport and finance. One has an end. The other does not.
  • “Markets are nervous”. Markets run on nerves. They are tailor-made for neurotics.

 

Bottom Line: We’ll leave you with the thought that short term outlooks are just that. They may be correct and there may be profitable round trip trades to be made. But that is not how successful long term investing works. And now is not the time to trade. We take a long-term view and position our clients accordingly.

 

–Christian ThwaitesBrouwer & Janachowski, LLC

 

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future.  This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.