: The Market Check-Up

Market Impact of the U.S. Presidential Election

The market was clearly pricing in a Clinton victory. When the Clinton email
investigation was re-opened, the market dropped 9 straight days, a feat that
was last accomplished in 1980. When the investigation was dropped once
again this past Sunday, the market responded positively on Monday and
Tuesday.

Dow Mini Futures - Bloomberg.com

The market always has a hard time digesting uncertainty. As the results were
coming in reflecting Trump victories in battleground states the markets
reacted swiftly and severely (see above). At one point the futures markets
(markets that trade when normal trading is closed) were down 5%. Early this
morning, the markets had a 50% retracement and were only down 2.5%. At
9:25 (5 minutes before the market opened) the market was down 1% and two
minutes after opening, the market was positive. If you looked at the general
stock market today, you would feel as though today was a normal day,
however, if you look towards certain sectors of the market you really see some
upheaval (see below).
Day Percent Change through 1:30 p.m. on 11/9/2016

We are not discounting the fact that a Trump administration does create more
uncertainty than a Clinton administration, but we are encouraged to see a
resilient stock market in the face of uncertainty. This is yet again more
evidence that we are in a cyclical (short-term) bull market within a secular
(long-term) bull market.
We have shown charts in the past that reflect performance of stocks under
different executive and legislative branch regimes. The markets typically like
a balanced government but they have also behaved well under a Republican
controlled government. The important thing to remember is that an
investment strategy should never be built around whoever is President. The
bigger factors are described below.

Global Economy
The Global Economy as well as the U.S. economy have been growing at slow
rates for quite some time now. Because the U.S. economy is the largest
economy and has the biggest impact on a global scale versus any other
economy, we put strong emphasis on how we are doing in the U.S. A U.S. led
global recession is typically the worst type of recession (cite 2008). However,
when looking at facts, we do not see a recession on the horizon here in the
U.S. Third quarter real GDP in the U.S. beat estimates at 2.9% annualized

growth rate. Additionally, leading economic data has not deteriorated in a way
that would point to a recession in the next six months.

Recession risks are higher when looking at the entire globe but the outlook is
set to improve in the coming months and risks are ebbing. The output index
recently jumped the most in three years, growth in new orders has also
accelerated to its best level in two years. Most countries manufacturing
sectors are expanding (chart below from Ned Davis Research), emerging
market economies are showing some signs of life (especially those commodity
driven), and central banks across the planet remain accommodative.

U.S. Stocks (We Remain Bullish on Certain U.S. stocks)

Positives:
Year-over-year earnings growth looking better with 71% of the
S&P 500 companies reporting earnings above their mean estimate
for the third quarter.
Inflation starting to pick up due to positive economic
developments.
Low probability of a recession currently in the U.S.
Negatives:
Valuations are still stretched and would limit upside potential,
especially with high dividend stocks.
Strengthening dollar versus trading partners currencies could
keep economic growth low and earnings suppressed.
Government debt and budget deficits continue to hinder
economic growth.
Market breadth has slightly diminished.

International Stocks (We Remain Bullish on International

Stocks)
Positives:
Better valuations compared to U.S. stocks.
Central banks even more accommodative than the Federal
Reserve.
Negative rates receding is reducing market anxiety.
Emerging market stocks have made a comeback this year resulting
in solid global stock market breadth.
Financial stocks have gained relative strength since July (post
Brexit fallout).
Negatives:
Still no all clear on Global Economy. Although the chance of
recession is decreasing globally, it is still higher compared to the
U.S.
Bonds
Below is a graphic showing what interest rates are doing today. These are big
moves in the bond market. Short-term rates are increasing the most on a
percentage basis reflecting the expectation of an interest rate hike this
December.

The FOMC statement on November 2nd clearly expressed greater confidence

that the Fed will reach its 2% inflation objective. The 30 day Fed Fund futures
prices are reflecting a greater than 70% hike in December. Combining
historically low interest rates with improving credit conditions and an
expanding economy, we still prefer short-term high grade corporate bonds.