November 11, 2016
Markets embrace Trump
It was a busy week filled with unexpected surprises led by Donald Trump’s U.S. presidential election victory. As surprising – if not more so – was the market reaction. It was enthusiastically positive as traders welcomed the prospect of expansive fiscal stimulus under Trump which could bolster economic growth. President-elect Trump has said he wants to lower corporate and personal tax rates, boost infrastructure spending and reduce regulations across a number of industries. All are viewed as positives for growth but at this stage they’re only verbal commitments without any detailed strategies or policies to support them. In other news, euro zone retail sales data released Monday showed a drop of 0.2% in September. That comes on the heels of a revised 0.2% decline in August which makes it the first back-to-back decline since September/October 2015. Turning to China, the Consumer Price Index was up 2.1% yoy in October which puts it well above the recent low of 1.3% but far short of the government’s 3.0% target. China’s Producer Price Index also rose in October – 1.2% yoy – and is now above zero for the last two months after almost five years in negative territory. Elsewhere, OPEC said Monday that the oil cartel was still committed to an output deal made in Algeria in September. Doubts had grown about the group’s ability to stick to its commitment and many analysts remain skeptical that OPEC would be able to co-ordinate the cuts required to achieve a balanced market in 2017. Attention now turns to the group’s meeting November 30 and what impact a Trump victory may have on the decision-making process as he has publicly stated his desire to ramp up U.S. oil output.
Major North American stock benchmarks moved sharply higher over the four-day period covered in this report. The Dow jumped 920 pts. to close at a record 18,807, the S&P 500 rose 82 pts. to close at 2,167 and the Nasdaq ended up 162 pts. to settle at 5,208. In Canada, the TSX also applauded the Trump win adding 235 pts. to finish at 14,744.
Trump induced rally
Volatility indices (ie. VIX index) are declining fast from elevated levels which has historically been a good buy signal for equities. We believe there is ample cash on the sidelines that has been ear-marked for shoring up underweight equity allocations and awaiting a risk-off opportunity to deploy. In addition to cash over-weights, there was elevated pre-election protection buying and general inertia of investment decisions that will likely experience reversion in the near term – both tailwinds for equities. We believe although historically Presidential party changes have often led to indigestion periods of higher equity turbulence, we are open to the possibility that anxious investors might front-run historical tendencies and begin deploying cash quicker than usual – setting up a situation that if President-Trump is just as brash as Candidate-Trump, then markets will have to price in uncertainty risk premia at a later time. That being said, equity markets are currently implying Trump’s pro-growth stance (tax-reform, fiscal spends) will overcome Trump’s more anti-growth stance (immigration, protectionism). If that is the case, equities could enjoy a decent year-end rally. As such, we retain our cyclical/value bias of favoring Banks, Insurance, Energy and will add Industrials (Infrastructure and Defense) to the mix in relation to our underweights in defensive/yield names such as Utilities, Telecos and Reits. In addition, we will initiate our preference for US domestically-oriented sectors (Small Caps, Retailers etc.) as opposed to US Exporters and are moving to neutral on our view of the Rest of World over US.
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