By David Guttery, Keystone Financial Group
What investors should watch
In the brief time since the US presidential election, we have seen significant market trends emerge: US stocks have rallied, we’ve seen weakness in emerging markets, the dollar has strengthened, the 10 year US treasury yield is up sharply, and inflation expectations have increased.
Markets a voting machine in short-term
All of these post-election market moves are presumably in expectation of specific Trump administration proposals coming to fruition. But is this realistic?
Before the election, I thought that a Trump victory would likely result in a visceral response in financial markets. But that’s because, as Benjamin Graham long ago explained, markets are a voting machine in the short term. However, in the longer term markets are a weighing machine, which means any longer-term market moves must be supported by actuality rather than expectations.
Different Trump proposals will take varying amounts of time and political negotiation to come to fruition, if at all. We could see some thematic plays regress between now and when related Trump policies are actually implemented. But what’s perhaps more important is to contemplate the ramifications of current market conditions.
December Fed hike likely
It seems more likely than ever that the Fed will hike rates at its December meeting. With the 10-year Treasury yield higher as well, borrowing costs have increased and will likely continue to do so. Mortgage rates have already risen and this could put a short term damper on the recovering housing market. However, I believe the longer term trend will continue to be positive for housing given the disparity between supply and demand.
If we see continued strength in the US dollar, this could create a headwind for parts of the US economy that rely on exports. Large US companies that derive a significant portion of their revenue from outside the US could suffer while smaller domestically-reliant companies could benefit.
What about inflation? Fiscal stimulus along with trade tariffs, especially with the unemployment rate below 5%, could be inflationary. That’s especially true if there is any mass deportation of immigrants who will leave behind unfilled jobs. Asset classes that have historically held up well in the face of inflation should have substantial representation in portfolios.
In this unique post-election environment, we are likely to see a continuation of the trends we have already seen in the past two weeks, although they may moderate. But given the uncertainty that comes with this new administration, we need to be prepared not just for these short-term market moves, but also for the longer-term economic opportunities and consequences of anticipated Trump policies.